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INCOME AND EXPENDITURE

Page 1

The year end accounts contain a Statement of Income and Expenditure, which shows how much money came in against what was spent and is broken down as follows:

Income: This is the budget set for the financial year in question and shows the following:

  1. Service Charge Receivable: This represents amounts demanded for the period in question;
  2. Interest on Late Paid Service Charges;
  3. Bank Interest Receivable.

Figures in each of these categories are added together to give Total Income

Followed by Service Charge Expenditure,Utilities & Insurance

  1. Water – Communal
  2. Electricity
  3. Buildings Insurance
  4. Directors & Officers Insurance
  5. Insurance Valuation

Figures in each of these are added together

Followed by Contracts Maintenance & Services

  1. Equipment Telephone Line
  2. Reactive Refuse Removal
  3. Drainage Maintenance
  4. Landscape Maintenance
  5. General Repairs & Maintenance
  6. CCTV System
  7. Fire/Emergency Lighting

Figures in each of these are added together

Followed by Fees

  1. Debt Collection Costs
  2. Management Fee
  3. Administration Charges
  4. Accountancy Fee
  5. Fire Risk Assessment
  6. Health & Safety Assessment

Figures in each of these are added together

Followed by Additional & Sundry Costs

  1. Out of Hours
  2. Bank Charges

Added Together

The total figure from each group are then added together to give the TOTAL EXPENDITURE

DEFICIT FOR THE YEAR

The Total Income is then subtracted from the Total Expenditure to provide the Net Surplus/Deficit for the year, in other words either an overspend or an underspend. If there’s an overspend, leaseholder may find themselves having to pay an additional amount (balancing charge) for the fact that more was spent than budgeted for (shortfall)  after the accounts have been reconciled at the end of the year. This balancing charge will show as as a deficit figure and the request for the shortfall will be collected from either a reserve fund or demanded in the form of Notice under s20B of the Landlord and Tenant Act 1985 (limitation of service charges: time limit on making demands).

On the other hand, if there is a surplus of contributions over what was actually spent this can a) be transferred into a reserve fund (if there is one) b) credited back to each leaseholders service charge account if this is dictated by the lease or c) carried forward to the next accounting year, as service charge accounts are worked out by the total charged to leaseholders throughout a budget year, not what has actually been received.

It is however important to note that surplus figures are not necessarily physical money in the bank as a result of everyone paying their service charges. If any surplus figure is credited back to each leaseholder then it is not added to the Balance Carried Forward figure.

PAGE 2

The next page of the statement of Income and Expenditure shows the following:

Income

  1. Sinking Fund Receivable

Sinking Fund Expenditure

  1. Repairs & Maintenance: This is subtracted from the Sinking Fund Income Receivable to give the Net Increase/Decrease for the Year.

Net (Decrease) For The Year

  1. Balance Brought Forward: This is the previous years Net Increase/Decrease for the Year and the Balance Carried Forward figure added together)
  2. Balance Carried Forward: This is the Net Increase for the current Year subtracted from the above figure

Then comes the Balance Sheet.

BALANCE SHEET

This is a snapshot of the financial position of a business on one particular day. It is called a balance sheet because there is a debit entry and a credit entry for everything (but one entry may be to the profit and loss account), so the total asset value is always the same value as the total of the liabilities. The balance sheet will show how solvent the business is, how liquid its assets are (in other words how much is in the form of cash or can be easily converted into cash such as stocks and shares), how the business is financed and how much capital is being used.

The individual figures can change dramatically in a short space of time but the total net assets (assets less liabilities) would only change dramatically if the business was making large profits or losses.

What the balance sheet doesn’t do is show day-to-day transactions or the current profitability of the business. However, many of its figures relate to (or are affected by) the state of play with Profit and Loss transactions on a given date.

The Balance Sheet is broken down into the following:

Current Assets: These are short-term assets whose value can fluctuate from day to day and can include stock, work in progress or money owed by customers.

Bank Balance: The amount shown here will be determined in part by the income and expenses recorded in the Profit and Loss Account. So if spending in the period before the accounts are published is exceeded by the sales income, it should mean that current assets will be higher than if expenses had outstripped income over the same period.

Service Charge Debtors: Monies owed by lessees

Other Debtors: Monies owed from elsewhere

Prepayments: These occur when a debt or installment payment is made before its official due date. It can be for the entire balance or for any upcoming payment that is paid in advance of the date for which the borrower is contractually obligated to pay it.

Added Together (with the Notes stating that service charge money was held in trust in accordance with s42 of the Landlord and Tenant Act 1987)

Current Liabilities: This is what the business owes and must repay in the short term (usually within 1 year) such as:

  1. Trade Creditors
  2. Service Charge Paid In Advance
  3. Loan from RMC
  4. Other Accreditors
  5. Accruals

These figures are Added Together

Reserves

  1. Sinking Fund

Income & Expenditure Account: 

  1. Balance Brought Forward
  2. Charged/(credited) to Residents
  3. Deficit for the Year

BEST PRACTICE

Current legislation does not state how soon the annual statement of accounts for service charges should be produced and issued to leaseholders after the year end although there may be a date in the leases or a statement that the information should be produced ‘as soon as practical’.

If there is no such date or statement then ‘best practice’ is for them to be issued 6 months after the year end. If there are more than 4 flats in the block, leaseholders have the statutory right to request a summary of all relevant costs incurred by the landlord for works and services that make up the service charges. This summary is to be prepared under s21 of the Landlord and Tenant Act 1985 (service charge information) as amended by the Landlord & Tenant Act 1987 for the last financial year. The reasonable cost of the preparation of the summary is properly chargeable to the service charge account.

Under s21(5) of the Landlord and Tenant Act 1985 the summary is required to distinguish between
a) items/costs for which no payment has been demanded of the landlord within the period to which the summary relates;
b) items/costs for which payments has been demanded by the landlord but not paid within that period; and
c) for which the landlord has paid within that period.

Under s21(6) of the Landlord and Tenant Act 1985 (service charge information) the summary must be prepared by a qualified accountant (who under s28 of the 1985 Act a is defined as a ‘registered auditor’) as:
a) in his opinion a fair summary complying with the requirements of subsection 5 of s21 and
b) being sufficiently supported by accounts, receipts and other documents which have been produced to him.

In practice a) and b) can usually be equated to accruals and creditors respectively but there are cases where tribunal have held different interpretations.

This section also requires the summary to include the total of any money received by the landlord for service charges and still standing to the credit of the tenants paying these charges at the end of the period and any costs which relate to works for which grants have been paid or will be paid and show how they have been reflected in the service charge demands.

Finally, s19(2) of the 1985 Act requires that when a tenant has paid service charges in advance the amount payable must be reasonable and the landlord must repay any excess paid, or deduct it from subsequent charges, as the lease directs once the costs have been incurred. Advance payments and actual expenditure need to be clearly presented.

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