Category Archives: 1 Basic Accounting

Receiving the money for the sale

You have made the sale and since your customer didn’t pay in cash at the spot of making the sale, you did recognize a receivable against the customer on your balance sheet. All is fine and good and now the date for the real payment arrives. Your customer is a decent company and it’s going to pay up its debt in due time. As such, the accountant over there is making a bank transfer to send the money to your account. The moment you can actually see the transfer is when it arrives to your account, however.

So you open your bank statement for the period (i.e., day, week or a month) and notice that the payment has arrived. The accounting entry for this should be as follows:
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Making the sale

One thing is the selling process, like agreeing over the goods, their price and related conditions, but the other part of the sale and something we’re focusing on, is the accounting treatment of a relevant sales transaction. At the end of the day companies are making sales to earn profits, so accounting for the sale is equally important to ensure the sale is in fact helping to make profits in the accounts. Now, in a regular and most common situations the treatment itself is fairly same.

When the agreement has been reached, the seller usually either ships the goods or renders a service, whichever the case may be, and accounts for the sale. Accounting for the sale is done as follows:
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Receiving the balance you had written down

Receiving the balance you had written down
You had thought you wouldn’t receive the balance in full so you recognized an allowance on the balance sheet. What you had there, was the receivable balance in full and an allowance for the very same receivable. With recognizing the allowance, you also had to bear some expenses in the same amount.

So, in this situation, with those accounting entries made, you now receive the payment from your client. Be it that they found some additional investment and are now to meet all their obligations etc., what you should do now, is the following:

1) Recognize the cash received
Db Cash and cash equivalents
Cr Accounts receivable

2) Get rid off the allowance made because the receivable it was made for has been collected (so in essence it’s not an expense on your income statement)
Db Allowance for doubtful accounts
Cr Expense from increasing the allowance for doubtful receivables
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Writing down receivables on your balance sheet

Accounts receivable balances are subject to valuation risks and what’s more, subject to the question whether they are collectible or not. At every balance sheet date, you should ask yourself if there are any indications that the balances are not recoverable in the amount they’re recognized on your balance sheet.

If the answer to the question is “no” as in you have no reason to believe your client will not pay up its debt in full, you don’t have to do anything. However, if the answer is “yes”, there are two further considerations to be made. In the case where there’s doubt whether the client is capable of paying at all as in it’s in bankruptcy or some such serious financial difficulties, the receivable may be better to be written off the balance sheet. However, with this post we are focusing on the second case, where the client is just facing some financial difficulties, which result them just not meeting the payment terms every now and then and possibly only paying partially more often than normal.
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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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