Author Archives: Karl

Donations received – how to treat them?

Specifics are always tied to events and occasions, the donations received as such are hence dependable of the business type, industry the company is in etc., however, if there is an occasion your company does receive a donation, the treatment and disclosure requirements are still more or less the same. There are some special disclosure requirements for government grants and donations, but please consult your local reporting and disclosure framework guidance for it. With the following we are focusing on the accounting treatment.

If the grant is just given out without any further conditions, the amount given is your income (note here that if it’s for a specific investment or type of expense, it’s always shown as a part of that investment (decrease) or expense (decreasing the expense in essence)). When you receive the money or it’s more than probable you will obtain the donations and there are no conditions tied to it, you make the following entry:

1. You get to know of the donation to be received

Debit Other receivables 500
Credit Investment purchase / Operating expense / Other operating income (depending on the type of the donation – see above) 500
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Donations paid – how to treat them?

There may be a time and place in your business that you feel like you want to make a donation to someone. Be it whatever it is, the treatment is still the same.

If the grant is just given out without any further conditions, the amount given is your expense. At the time of the decision made you recognize an expense and a liability and when the payment is actually done, you just debit the liability and credit your cash account.

1. Making the decision

Debit Operating expenses 500
Credit Provisions / Other liabilities 500

2. Making the payment

Debit Provisions / Other liabilities 500
Credit Cash and cash equivalents 500
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Operating lease payments

In essence operating lease is something that has minimal risks – you just use the asset, pay for it and only if deemed so, have to also take care of the regular maintenance. The ownership and risks related to this however are never yours (if they were, it’d be a finance lease).

All that you essentially have to worry about is the cash flow needed to pay your monthly dues and that’s about it really. An operating lease does not affect your balance sheet in no other way but the initial payment in the form of prepaid expenses, the cash and profit. No other balance sheet item is affected.
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Initial operating lease payments

You stepped into an operating lease agreement and as you do that, you also have to pay a considerable amount as the first initial payment (something like 10 to 30% even). This payment is obviously deducted from the total of your payments hence making the monthly payment smaller. As the monthly payment is smaller, there’s one thing to remember with the initial payment though.

The initial payment is never charged as an expense straight away, but recognized as an asset first and the charged into expense over the rental period. It is meant so to spread out the expenses made for an agreement that goes through a longer period.

The accounting entry for recognizing the initial payment is as follows:
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Derecognizing accruals

You’re accruing for missing invoices and possibly even revenue for which you haven’t issued an invoice yet into your balance sheet. There is a certain amount as a liability or an asset (in case of revenue accrual) on your balance sheet and everything couldn’t be more accurate. All your expenses and income are recognized in proper periods and as such the accounting is correct.

Now what to do when the invoices actually arrive or you are able to send an invoice to your client?
Something that you should not do is recognizing those invoices as expense or income. Why? You should not do it simply because they already went through your income statement in the prior period. Doing it once more just generates extra expense or income and messes up your accounting. I’ll tell you why.

Let’s say you have accrued for a supplier invoice so that you add expense to your income statement and also take up a liability. The entries are as follows:
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Accruals – get into the habit of doing them

Accruals are something you create and recognize on the balance sheet for expenses and income when you haven’t gotten or haven’t issued the invoice yet, but you do know that it’s probable the transaction will happen and it does relate to the period at hand already.

Whereas you do not have the document for it, it’s imperative to have expenses and income recorded in proper periods. For such cases, there are “accruals”. Since the accounting is mostly done accrual based (i.e. when the event happens and not when the cash actually moves), there is no other way of getting things right, than accruing for income and expenses.
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Credit invoices in the next period

Every now and then it may happen that you have to credit your sales – either returned goods, improper amounts on the invoice etc. There may be numerous reasons, but fact of the matter is, that sometimes you do have to do it.

Now whilst in essence it’s not that difficult, you just recognize an invoice with a negative figure and add it to proper client account, something you do have to be watchful with however is the period which revenue you’re decreasing. In the middle of the period it’s not a question, but if it’s prior period sales (and especially if it happens in January that you have to credit December sales), the credit should also be put into the period the sale it relates to was made.
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