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?
However, what you also must recognize on the balance sheet and income statement is the receivable and the revenue. What you do, is just as you have encountered the expense you credit other revenue and debit receivables. So on your income statement, your profit stays unaffected (or is affected by just the difference between the expense and the income if you’re not compensated in full) and your income is recognized in the same period as the expenses it relates to.
Always ask yourself the first question – is it more definite than not that I will get the money? If the answer is “yes”, then you must recognize the revenue.