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Accounting Conventions, GPs Accounts and Superannuation

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The annual accounts for your practice prepared by your accountant and presented at the yearly meeting are the product of a process that is underpinned by basic accounting conventions. These conventions have probably never been explained to you as their relevance has only been academic, but the changes to the GP superannuation scheme places more emphasis on the conventions and how they affect the disclosure of profits.

The changes to the GP superannuation scheme mean that a GP's superannuable income will be based on their share of profits. Profits are a subjective measure. When income or expenses are included or excluded they affect the profits and therefore the measurement of superannuable income.

The first convention to mention is prudence. This means that accountants have different rules for measuring income and expenses. Prudence is all about being cautious. Accountants will bring in expenses if is it possible that they will be realised, but will only bring in income if it is probable that it will be received. This impacts directly on the achievement points from the Quality and Outcomes Framework. Your accountant will have seen what you have told the PCO that you will have aspired to, but will want to know what you think you will achieve. In most cases, the achievement points will be less than the aspiration points, and your accountant will be prudent and choose the lower expectation.

The reason for this prudent behaviour links directly with the second accounting convention to mention, that of accruals or matching. The accounts should include income earned and expenses incurred in the year, and not just income received and expenses paid. This allows for the inclusion of debtors (monies owing to the practice) and creditors (monies owed by the practice) to give a more accurate picture of the financial position of the practice at the year end. Once again, this impacts directly on the achievement points from the Quality and Outcomes Framework. At the end of the year, you will have received your aspiration points but are unlikely to have received your achievement points. To match the income earned to the accounting year the accountant will bring in the achievement points not yet received, of course on a prudent basis. You will see these monies owing in debtors.

The third concept to mention is consistency. The accounts should be prepared on a consistent basis, with no change in the underpinning principles governing the preparation of the accounts. For instance, if notional rent due to be paid to property owning partners has always been shown as an extra share of profits rather than a practice expense, that should continue to be the norm. This is primarily to make it possible for the reader of the accounts to understand and compare the information in the accounts. This convention is sometimes modified either when the rules surrounding the payments change, or more frequently when changing accountants. For example, it will not be obvious that in the notional rent example mentioned above, one method precludes obtaining business taper relief for capital gains tax purposes while the other ensures it. In such a situation, the accountant would be negligent to ignore the situation and not change the previous consistent approach.

Finally, we look at the convention of going concern. Simply stated, this means that the accounts are prepared on the basis that the practice will continue. We assume that the practices' assets will continue to be deployed and will gradually wear out through depreciation. If we did not assume the practice would be a going concern, would have to value the assets on a basis that they would be sold. And of course, such a valuation would have to be applied on a consistent basis, choosing a prudent value, and accruing the costs of sale.

November 2004