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Proper Accounting for Erroneous Funds Received

Hello - We received payment (cleared our bank) that were supposed to have been directed to another company. We are now going to be sending payment to that company as reimbursement. What is the proper accounting for this? I believe it is a debit to our checkings and a credit to AR, but this seems odd to me. Thanks for any guidance..

Answers

Marjorie Yuschak
Title: Principal
Company: YM Strategies, Ltd.
LinkedIn Profile
(Principal, YM Strategies, Ltd.) |

The correct accounting would be a debit to cash and a credit to Unearned Revenue. You shouldn't use AR because this is not a sale on account. When you issue your check as reimbursement, simply reverse this entry.

david waltz
Title: Assistant Treasurer
Company: Integrys Energy Group
(Assistant Treasurer, Integrys Energy Group) |

For security reasons, rejecting the original payment is a safer approach. Otherwise, you may inadvertently be a money laundering accomplice or take part in the Nigerian check scam (if your bank controls are not airtight - payee positive pay, etc.). From the 'books' point of view, it becomes a bank reconciliation timing issue rather than a receipt followed by a payment.

Andrea Bornschlegel
Title: Fractional CFO/Controller
Company: Financial Consultant
(Fractional CFO/Controller, Financial Consultant) |

I agree with David, and along those lines, if it is too late to reject the payment, insist on making your payment back to the original payer, not the company it was destined for. In that case, you would need to park the credit somewhere on your B/S, and I would use a non-trade payable account, not unearned revenue.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

I agree with all but the most simple method of handling since you stated you already deposited the funds is to reverse it as Marjorie mentions. Whatever GL account you applied the funds to, when you cut a check back to the original check holder you would apply it to the same place. It is then a wash.

John P. Hart
Title: Vice Pres - CFO
Company: Nova Pressroom Products, LLC
(Vice Pres - CFO, Nova Pressroom Products, LLC) |

Simple answer: Simple reversal.

But there be more at play here than a basic accounting question.

I agree with David Waltz to take caution with a quick refund/return. Investigate the source of the original funds. What was the FOP? Can the original payment be reversed if you've refunded? This could well be a variation of the Nigerian scams.

If a direct deposit (ACH/EFT) that was misapplied by the your bank, then it should be the bank's responsibility - not yours. Get the originating and receiving banks involved before you make a direct reimbursement payment. Your bank should take the lead if this is the case.

If your staff received a check or credit card payment, and deposited the item that wasn't intended for your firm, then an additional review should ask how and why the funds were received and deposited without a corresponding customer/invoice/account receivable transaction.

Unless all of this is very clear, I'd recommend being very deliberate before any reimbursement!

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