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To understand how service charge accounts are prepared it is important to at least have an overview of  the in-house accounting practices used by the managing agent.  Ours holds one ‘physical’ bank account and their system allows them to allocate funds to 4 ‘notional accounts’ for the separate services (both service charge and statutory accounting) they provide.

These 4 accounts are comprised of the following:

NOTIONAL ACCOUNT 1: Service Charge

Through this account all income and expenditure for the service charge is recorded and for the Year End Service Charge Statement Tech 03/11 requires the following: an Income and Expenditure Sheet, a Balance Sheet and the Notes. More on these can be found here.

NOTIONAL ACCOUNT 2: Ground Rent

Because our managing agent also prepares the company statutory accounts this notional account becomes the one used to record company financial movement i.e. ground rent income. The correct way to reflect this is to increase the bank balance (dr) and show income (cr) in this account. At the request of the freehold company Directors funds can be ‘loaned’ from the statutory accounts to the service charge account, reflected as a payment out of one and a receipt into the other. Each of these transactions has a corresponding entry:

  1. The corresponding entry to the payment FROM the statutory accounts would show a debtor due from the service charge accounts;
  2. On the other side, the corresponding entry TO the bank receipt for the service charge would be to show a liability due to the statutory account.

NOTIONAL ACCOUNT 3: Reserve Fund

This was initially establised by our previous agent because they demanded the service charge and ground rent individually. Now, both the contribution to the service charge and the reserve fund are combined in one figure when the service charge accounts are prepared;

NOTIONAL ACCOUNT 4: Directly Recovered Costs:

The movement for this notional account is for the referral fees collected by our agent when they refer tenant accounts to the company solicitors. The funds are distinct from the service charge and the freehold company fund

All transactions within these notional accounts are reconciled to their physical bank account daily by the accounts receivable team.

Each of the notional accounts support the trial balance, which allows the preparation of the year end accounts where the accounts are reconciled, which means making one account consistent with the other.

More on the trial balance can be found here.

 

 

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