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.

When it comes to compensation however, there are two things to consider. Do you know for certain you will get your money back from this someone else or not? If yes, then just when you have made an expense, you should also recognize a receivable balance alongside with other revenue on the income statement. If you cannot make an invoice just yet, just recognize an accrued revenue receivable. In case you don’t know yet if you will get your money back and nothing has been agreed so there’s no certainty, you shouldn’t recognize the income and receivable, not until you know for sure it’s being compensated.

So, on the income statement you will end up having still your expense, but also the other revenue, namely the compensation. The net effect is either zero, if being paid in full, or the difference between the expenses and the compensation. However, bear in mind that in the annual report the other revenue for specific expenses is usually shown in the very same group as the expenses themselves – as they are related, they should be shown in the same group to show the actual expense made by your company.