I have a bit of a complicated question, so please bear with me while I try and explain the situation.
I have a client who owns a cake making company. She receives deposits at time of order, and then receives full payment at time of delivery. She seems pretty adamant, that the deposit is not shown as an asset, as this may be paid back at any time, and she only wants the full payment to be shown as an asset. Myself and the accountant have both tried explaining to her that she still needs to show it as income, but she disagrees.
Am I right that a deposit does need to be shown as income, and if so, is there a way to account for it differently so it is not showing as an asset? I am just working on a spreadsheet, although the accountant then uploads it to Xero.
Yes deposits need to be recorded as income and accounted for on the date taken, we had an inspection a few years ago and how we treated deposits was one of the things the inspector wanted to see. I keep a separate nominal code in the 4000's in sage, hope this helps a little.
You do not state whether your client is n the cash or accruals basis. You also make no mention of VAT.
I'll assume accruals basis, non VAT registered.
Answer :
I'm with the client rather than your accountant. The deposit is a liability similar to a prepayment. For this sort of business unless the deposit is non refundable you have no right to that money until performance of duties
Revenue should not be recorded unless there is a right to receive such as when your client has fulfilled their obligations. Your client has not yet fulfilled their obligations under the contract.
If the deposit and fulfillment of obligations fall in the same period then the whole arguement is a no never mind. The debate is around issues where the two elements of the transaction are performed in different periods.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
there's a load of what if's around deposits and there are situations that you can argue that a deposit should not be recorded as income and others where the deposit is more akin to a credit arrangement.
I'm happy on this one to agree that we are both right dependant upon the rest of the scenario in that one has to consider all manner of variables but a deposit on a cake I would see going down the liability / balance sheet only route.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I am with Shaun, you haven't provided the service yet, and, with the nature of the stock, the costs wouldn't appear in the accounts until the week before the cake was due to be made. If matching is to be done, then a creditor for payments on account should appear on the balance sheet, and be released when the service has been executed. If the client pays back deposits, then they are simply holding monies, not making sales - much like when you pay a rental deposit, you would put that on the balance sheet. If the customer forfeits the deposit, say by cancelling too late in the day, the deposit would be released on that day, and match any costs that have been spent on the cancelled contract.
Now if the client was VAT registered, I do agree that VAT should be accounted for when the deposit is taken. I have seen HMRC enforce this, and usually VAT is declared on the difference between opening and closing payments on account, on a quarter to quarter basis.
PS - I've assumed accruals basis also... wouldn't be the same for cash accounting
-- Edited by FoxAccountancyServices on Tuesday 15th of September 2015 01:41:59 PM
I agree with Shaun and Michelle. I looked after a kitchen company - the deposits were dealt with as a liability, VAT accounted for when the deposit was taken (standard VAT) deposits released to income as the jobs were executed. Recent VAT inspection confirmed this was right under our scenario. As the guys say a lot depends on the nature of the deposit terms.
__________________
Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Great, thank you for the replies. They are VAT registered but work on the accruals basis. There is no VAT on cakes so she doesn't charge VAT. I understand now that it would be a liability rather than an asset, so I'm happy with the explanation. Thank you all for your help, it makes much more sense now.
