more-arw search

Q&A Forum

Accounting for sales credit in lieu of cash legal settlement

Anonymous
(Sr Manager) | Jul 19, 2017

I am trying to figure out the accounting for a future sales credit that we are going to provide to a customer in lieu of cash payment of a legal settlement. I believe that it would be appropriate to book a liability upon agreement of the settlement but am struggling with what I would record once we provided the free services in the future. I don't believe that it is appropriate to record revenue once the free services are provided since we know that we will never collect on those sales. The debit would be to the liability but I cannot figure out what the credit would be.

Answers

Ken Stumder
Profile
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) | Jul 21, 2017

Are you sure it isn't a contingency against already recognized revenue if this a customer dispute? Maybe future revenue is not impacted.

EMERSON GALFO
Profile
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) | Jul 22, 2017

The answer is in your question....

1. "...to figure out the accounting for a future SALES credit.."

2. "I don't believe that it is appropriate to record revenue once the free services are provided"

They are NOT "free services". They are STILL regular sales/revenue where payment just comes from a LIABILITY to the customer.

Options -

1. Book the liability and just reduce A/R (from client) until liability is paid.
2. Do the regular invoice then reduce the invoice contra the liability....thus a $0 invoice....until liability is zeroed out.

In both cases, I would also issue a separate accounting of the liability for every invoice issued/affected.

Here is the more important part of my response. WHY WOULDNT YOU WANT IT AS SALES???

You are paying it off at SALES PRICING (i am assuming) instead of "cash"
which means there is MARGIN on top of the actual cost of the services and
the total is used to pay off the liability.
(not sure if I worded that right...but hopefully you get the idea).

346 views

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.