Expert: Don Sadler - 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 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.  
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
I hope this helps… accounting is outside my expertise and I nearly refused your question but it sounded like you really need some advice so I asked a colleague (who does know accounting) to make a comment.  Here is her response…

If too much was deducted, then the JE you did to put the "deposit in transit" back into the account for year-end, and crediting the pre-payment amount, causes your year-end figures to not actually reflect the correction of the payroll error.  Furthermore, this is not appropriately "cash", but is instead "other receivables" until the refund is actually received.   Your Jan-Feb correction should have come with payroll reports which reflected credits to payroll wages, taxes, etc.  These corrections should have been accrued in to 2005.  You have undoubtedly recognized them by payroll interface or by JE when they were received, and recognized the cash addition to the bank account as well.  (So your bank account will be overstated in Jan-Feb 2006 unless you get rid of the "in-transit" December amount.)  I suggest:

1)   Prepare the appropriate entry with which you recognize the Jan-Feb return of the funds, with the specific credits related to payroll expenses and the debit to cash.  Accrue this entry into December 2005, reversing it at the time it actually occurs so that the actual occurrence can book in its normal means (through payroll interface) without a duplicate entry.  The debit should be to "other receivables" instead of cash, though.  This puts the asset and the P&L benefit back into 2005.

2)  Reverse out the previously made cash-prepay entry in December


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I hope this is helpful to you.  My colleague is leaving today so will not likely be available for further comment.  Again, I do not know accounting but wanted to offer something to you.