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.
Accounting for sales credit in lieu of cash legal settlement
Answers
Are you sure it isn't a contingency against already recognized revenue if this a customer dispute? Maybe future revenue is not impacted.
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).