Cash basis accounting question
There exists a drawdown account wherein the balance is reduced as customer service requests are made.
For example, a customer will deposit $1,000 with a company. That $1,000 will go into the bank and be accounted for in a special customer account (SPA). As the customer makes service requests, the balance in the SPA account is reduced. For example the customer might request a service that has a $100 fee associated with it. Upon that service, the SPA account will be reduced by $100 (balance then goes from $1,000 to $900).
In a cash basis system, how should any remaining balance in the SPA be accounted for? Let's say at the end of the year, there still remains $400 in the SPA account (customer only used $600 throughout the year). The customer is entitled to any unused money if they request it but if they don't, the unused balance will continue in their account into the future.
My dilemma is whether the $400 (because it is returnabale to the customer or usable by them into the future) should be recognized as revenue in the year it was received.
For example, a customer will deposit $1,000 with a company. That $1,000 will go into the bank and be accounted for in a special customer account (SPA). As the customer makes service requests, the balance in the SPA account is reduced. For example the customer might request a service that has a $100 fee associated with it. Upon that service, the SPA account will be reduced by $100 (balance then goes from $1,000 to $900).
In a cash basis system, how should any remaining balance in the SPA be accounted for? Let's say at the end of the year, there still remains $400 in the SPA account (customer only used $600 throughout the year). The customer is entitled to any unused money if they request it but if they don't, the unused balance will continue in their account into the future.
My dilemma is whether the $400 (because it is returnabale to the customer or usable by them into the future) should be recognized as revenue in the year it was received.
Zac Harris
The funds would be considered as income in the year received. If you don't want to take on that extra tax liability you should refund the money before the end of the year.
ASKER
But there is money in a customer account that continues indefinitely unless the customer requests a refund. It is that account that is the real problem. The question is how does the unused balance get accounted for at the end of the year and into the following year in a cash basis system.
Not discounting the possibility that accountants are around here willing to help, you need to speak to your accountant - your state, even city, may have different rules regarding this and I doubt they'll waive penalties and interest if say "but I asked on a forum".
If you took the funds in, it is considered income. So the cash is just like if they sent you a check or wire transfer. If you count it as income this year, you don't count it next year because the money was received and accounted for this year.
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I would think that it greatly depends upon the type of account that is being used. If it is setup as a trust account with your company as the trustee then only the used amount would be applied as income for that year.
This is an area in which you'd really be better off spending money on a tax lawyer and a taxation accountant for your companies business location.
This is an area in which you'd really be better off spending money on a tax lawyer and a taxation accountant for your companies business location.
Thanks and I was happy to help