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Greater retained profits than cash in bank?

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    Greater retained profits than cash in bank?

    I've been contracting through my Ltd for 13 years.

    When the Ltd was setup, I started with nothing in the company account, work performed, invoices sent and paid etc.

    Since I've been inside IR35, 95% of revenue was paid as salary/pension. 5% profit, some expenses etc, small amount of corp tax paid on the remainder.

    Now I'm in a position that the company has more retained profit than I have cash in the bank. The difference is around 15k.

    I've just switched accountant for the first time, and have asked the new accountant to look into it, but my question; is this normal?

    My simple understanding of a typical year; 100K revenue, Salary/Pension: 95k, Corp tax: 950 = 4k retained profit.

    What am I missing? (besides 15k! )

    #2
    This is normal and is a feature of standard accounting practise and whether a given transaction affects the P&L or the balance sheet.

    Retained earnings are the accumulation of profit over the years and does not equal cash in the bank because not every accounting transaction is a cash transaction.

    Comment


      #3
      I've had a few instances where the cash in bank was greater than retained profit due to VAT and corporation tax due.

      Also depending on your payment terms (30 - 60 - 90 days), your accounting balance might show profit but the money is still not in the bank so you can't extract it until you get paid.

      However, in your case it looks like there are other things going on.
      Last edited by zonkkk; 6 January 2022, 08:14.

      Comment


        #4
        Check your balance sheet the answer should simply be there. The total liabilities plus share capital and retained profits will match total assets. You just need to find the difference. It could be something like an outstanding liability or your computer equipment if they're on the balance sheet. Anyway your new accountant should be able to provide the answer.
        I'm alright Jack

        Comment


          #5
          As noted above, the most obvious discrepancy when accrual accounting is that profits are incremented when invoices are raised, but payments happen later. In your case, it’s hard to say and your accountant will need to clarify. I hope you understand that the 5% IR35 expenses allowance only applies to the (now very narrow) case of ITEPA Chapter 8 Part 2 (i.e., a small client or fully overseas supply chain).

          Comment


            #6
            If you can't immediately see the discrepancy in the balance sheet, then simply compare this year's balance sheet with last year and check the changes against the P&L.
            I'm alright Jack

            Comment


              #7
              As others have suggested, bank balance and retained profits will rarely agree. The balance sheet should explain why.

              Typically a month into contracting you'll likely have issued your first invoice. Say it's £10k, but the client doesn't pay immediately. Assuming for simplicity there's no costs or indeed tax, at that point you'll have £10k profit, £10k debtor due from your client, but nothing in the bank yet.

              Longer term typically if anything it'll be the other way around, unless your clients are very slow to pay and/or you pay your corporation tax early. Ie you'll typically be in a position where your company has a fair bit of cash, but a chunk of it is earmarked for HMRC as your CT liability, so your retained profit is lower than the cash balance.

              None of the above relates to IR35, indeed I don't see any particular relevance of that, other than all company related numbers will be smaller (as effectively you're deemed an employee for inside IR35 work, so the company makes no profit on it).

              Comment


                #8
                Originally posted by Winger300 View Post
                I've been contracting through my Ltd for 13 years.

                When the Ltd was setup, I started with nothing in the company account, work performed, invoices sent and paid etc.

                Since I've been inside IR35, 95% of revenue was paid as salary/pension. 5% profit, some expenses etc, small amount of corp tax paid on the remainder.

                Now I'm in a position that the company has more retained profit than I have cash in the bank. The difference is around 15k.

                I've just switched accountant for the first time, and have asked the new accountant to look into it, but my question; is this normal?

                My simple understanding of a typical year; 100K revenue, Salary/Pension: 95k, Corp tax: 950 = 4k retained profit.

                What am I missing? (besides 15k! )
                Accounts are prepared based on accruals which means your profit will increase as soon as an invoice is raised even though its not paid yet. As others suggested, answer will most likely be in balance sheet.

                Comment


                  #9
                  You're correct, the Balance sheet makes it all clear.

                  I have both some outstanding invoices awaiting payment, and also an amount for work-in-progress which raises the total assets.

                  I made the mistake in thinking that I could withdraw in dividends the amount showing as retained-profit (FreeAgent).

                  Comment


                    #10
                    Since I've been inside IR35, 95% of revenue was paid as salary/pension. 5% profit, some expenses etc, small amount of corp tax paid on the remainder.
                    Could me being think but when you say since you've been inside 95% etc... you aren't referring to the inside money you've earned are you? How can there be profit, expenses and corp tax on inside income?
                    'CUK forum personality of 2011 - Winner - Yes really!!!!

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