Expert: Ed McFarland - 5/30/2006

Question
Hello!  I have a complex error in 2005 that I am hoping you can help me with.  In December 2005, there were two mistakes made by our payroll company, where they deducted too much cash from our account.  The errors were fixed, but the money did not get deposited into our account until Jan. & Feb. of this year (threre were two different amounts).  In an attempt to get our 12/05 bank rec to balance, I made a JE to our pre-payment account (credit) and our bank account cash account (debit) to cover these two dollar amounts (the two dollar amounts are $11,550 and $1,399 - also the debit and the credit seem backwards, but it made the bank rec reconcile).  The problem is that, in order to close 2005, the prepayment account needs to be cleared out (have a zero balance).  If I reverse the JE however, it will affect the cash account, but the cash balance for the end of the year includes the money in question.  What kind of adjusting JE should I make?  Also, the two deposits that show up this year need to show up on our accounting system, so that when I do the January and February 2006 bank recs, these amounts will
 be in the system to so I can "clear" them.

Also, the other kicker is that there was an $11,500 deposit that was on the Dec. bank stmt., but it was not entered into the system until January 2006.

Please let me know if you have any questions on this.  If you cannot help me, can you please suggest someone who can?
Thanks,
Teresa


Answer
First off I wouldn't treat this as a prepayment, rather it has more in common with a receivable. I'd treat it as money owed and not as cash paid out.

How material is this amount? If it isn't a big issue, I'd create an entry into a/r. If it is, maybe an entry into payroll.

good luck