Category Archives: 1 Basic Accounting

The accounting entries when it comes to compensations received

As we already mentioned in our previous post, on occasions when some of your expenses are being compensated, there’s one key question you must ask. Do you know it for certain? The most important element when it comes to recognizing anything on your financial statements is the level of certainty – is it below or above 50%. As it is hard to determine, it’s something the management has to estimate.

So in a situation where the management has estimated that it’s definite the compensation is received, it needs to be recognized on the financial statements. The expenses themselves are recognized as always – debit the expense account and credit the liabilities. When the payment is done later on, you debit the liabilities and credit cash. Sounds easy enough, right?
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You’re being compensated for your expenses

There are numerous businesses, where some of their expenses are being compensated by another party (i.e. party they are made for or who gets something out of it). Simply put you make an expense and this very same expense is later on either in full or partly being paid up by this someone else. You are the one paying for the supplier and you will receive compensation for it. Now the question is however, how do you recognize it all in your accounting?

Your expense is obviously an expense and should be recognized the same – under the income statement group it has always belonged under to. Hence also the liabilities and eventual cash payment is still done the same.
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Prepayments received is just increasing and nobody is actually asking for the service

In case you receive prepayments on a regular basis (i.e. gift cards etc.) there’s a high chance that the prepayments balance on your balance sheet is increasing and is most probably a considerable amount. I’m pretty sure that you have been wondering about what to do with this balance.

Generally when you receive prepayments, you on one hand increase “Cash and cash equivalents”, but you also take a liability called “Prepayments received” to your balance sheet. This liability cannot be turned into an income not until actual service has been provided.

However, what to do when you either know definitely (you keep record of all prepayments received and their date) or in case you do not keep specific track on the prepayments and have just a hunch that some of those are years old.
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You received a prepayment from your client, but were unable to provide the service at year end

Just recently we received a question about prepayments. Now imagine a situation – you received a prepayment from your client (either invoiced separately or charged as extra to compensate on extra services (like commercial space etc.), but due to whatever reasons you were unable to provide the actual service during the period or at year end. This in result means that you essentially received the money, but you didn’t do what you promised for it.

Yes, to start off, it’s not a nice place to be in, but it happens. It’s life and it’s business. Now, as we said, be the reasons what they may, we have the accounting for it to worry about. Normally, when you receive prepayments from your clients (say a 100 in our example), you should account them as follows:
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Cash in transit – practical tips

As we have mentioned already, every now and then it’s a must to send your excess cash to your bank. It’s this “cash in transit” – not yet arrived to bank, but already sent from your part.

Do it as regularly as needed to avoid any excess cash lying around. People have heightened temptations when it comes to cash and why first off give them that and secondly why not just avoid the trouble and risks. So try as often as possible to make sure the cash is transferred to your bank account.

Keep a good track record of how much money, when and by who was transferred and received. This way you can go back in time in case needed (i.e. in case of any dispute or something), you know at all times how much money should have been transferred to bank and how much actually was received and all in all it’s always good to have an overview of your assets and their movement.
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Planning for the cash count

Planning for the cash count In a way it’s kind of like planning for stock count. There are teams, instructions and the time. While there isn’t much else to add, it’s just this one little thing to watch out for – temptation that money creates.

To kick it off you have to plan the time the count takes place – plan it as close to year-end as possible and make sure you have gotten rid of all excessive cash by that time. Make sure you have the people available for the time planned and inform them of this count as soon as practicable.

Another thing to watch out is the people themselves. When we say that money creates temptation, the first thing you have to consider, is the trustworthiness of them. Can you trust them with money?

With the time and people selected and planned, make sure your instructions are up-to-date and that they include everything that you want to be included. Are the instructions clear and not confusing? Make all those who are going to be counting aware of the instructions and make sure they have read and understood everything.
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How much cash do you want to count?

How much do you want to count The obvious answer to such a question is of course “all”. And as you might guess, it’s obviously the right answer, but there’s a little more to it. Whilst counting all is a “must”, surely you can see that for practical reasons the smaller the amount, the better.

When we say practical reasons, we mean the saving of time, resources (i.e. people and expenses to extra work time) and reducing any risks. Risks which arise are obvious – exposure to temptations that money creates, human error that occur when counting etc.

So to save all the hassle, make sure your risks are as minimal as possible, make sure the cash amount to be counted is as little as possible – transfer it to the bank, pay off creditors etc. Reduce the physical amount to as low as practicable to your business model (i.e. shops need certain amount of free cash for an example).
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