I settled a lawsuit for an amount of money spread over 10 years with a large initial payment and the rest paid monthly. It will be considered income and I'm on cash accounting. I'm not going to use actual numbers but these are representative. The settlement amount is let's say 200,000 and the initial payment is 100,000 received mid year. I want to show the 200,000 as an asset with the payment against that asset of 100,000 as cash income for this year. The remainder should be on the balance sheet as 100,000 asset. I have added an account on the chart of accounts for the settlement asset account as an "other asset" which I thought would act like Accounts Receivable. I did a journal entry for the 200,000 crediting other income and debiting settlement. I then did a journal entry for the initial payment (100,000) crediting settlement and debiting the checking account. That is what I expected to show up on the profit and loss when cash accounting was selected but instead the entire 200,000 shows up. how do I get it to work in cash accounting?
Best answer November 01, 2018This " a journal entry for the 200,000 crediting other income" is why. JE's bypass accrual vs cash.
You can use a JE to create the receivable asset but not against income. Income happens as the note is depleted. I know you want the remaining balance to show as an asset on the balance sheet .
Back up and start over. "Sell" the settlement on an Invoice as other income for $200,000. Only the $100,000 actually received (as Receive Payment) will post as cash basis income this year.
To get the remaining 100k onto the balance sheet create a customer credit memo (same name as the payee) for 100k posted to an Other Asset account. Now going forward issue an Invoice as often as scheduled payments are posted as a reduction of the asset. What about income? I am getting to that. With a remaining balance of 100k on original invoice, and a new invoice for 10k for asset reduction, apply a portion of the 100k customer credit to that invoice and post received payment against the original invoice which will post as cash income when received.
Now those are the mechanics of it, I want you to review the process with your tax CPA to ensure that you can defer the income as payments are received. Just because you and I can agree that it should be so does not always mean the IRS will agree.
Community Champion November 01, 2018 04:45 AM" work not paid for it was work done several years ago and at this point those invoices were written off"
that would have constituted the exchange of one asset (A/R) for another but under cash accounting A/R is not a true asset and a write-off in the past would not have affected cash basis Balance Sheet.
So you have realized, just record the income as income as it comes in - but I still recommend using a Sales Receipt or Deposit and not a Journal Entry.
My final thought on Invoicing is, do you have to submit any paperwork to get this payment each year? Will you maybe in year 5 have to sue them all over again because they have stopped paying? That i n my view would call for invoicing to prove the debt.
12 Comments 12 Community Champion October 31, 2018 06:12 PMThis " a journal entry for the 200,000 crediting other income" is why. JE's bypass accrual vs cash.
You can use a JE to create the receivable asset but not against income. Income happens as the note is depleted. I know you want the remaining balance to show as an asset on the balance sheet .
Back up and start over. "Sell" the settlement on an Invoice as other income for $200,000. Only the $100,000 actually received (as Receive Payment) will post as cash basis income this year.
To get the remaining 100k onto the balance sheet create a customer credit memo (same name as the payee) for 100k posted to an Other Asset account. Now going forward issue an Invoice as often as scheduled payments are posted as a reduction of the asset. What about income? I am getting to that. With a remaining balance of 100k on original invoice, and a new invoice for 10k for asset reduction, apply a portion of the 100k customer credit to that invoice and post received payment against the original invoice which will post as cash income when received.
Now those are the mechanics of it, I want you to review the process with your tax CPA to ensure that you can defer the income as payments are received. Just because you and I can agree that it should be so does not always mean the IRS will agree.
October 31, 2018 08:09 PMI don't understand this part: "Back up and start over. "Sell" the settlement on an Invoice as other income for $200,000"
Putting an Other Asset item onto an invoice (AR is also an Asset) is Backwards. This isn't AR and it isn't Sales.
Are you a Cash or Accrual Basis reporting entity? Why would you want to show the entire $200,000 anywhere, if you have not yet received it? Who told you the entire settlement amount is a Factual Accounting Value to be entered now?
November 01, 2018 04:38 AMThanks to you both. I had actually just gotten away from the whole invoicing method because the way I did it made it look like sales. While the settlement was over work not paid for it was work done several years ago and at this point those invoices were written off and the amount was not consistent with them anyway.
Regarding entering the whole amount it is an amount owed to the company therefor, much as if the company would have loaned the amount, it is an asset of the company. As the balance is paid there will be an amount of the asset left and it would be nice, but not strictly necessary I suppose, to have that number available on the balance sheet. We are cash accounting for tax purposes so the only income that should be shown on taxes is the amount received.
Community Champion November 01, 2018 04:39 AM" Back up and start over" he said Journal Entries already in place. Back up means delete or void the journal entries and start with new "correct entries" using tools. I said to enter it as Income on the Invoice . It is income now and in the future. Other than wrong ways of journal entries there are only 3 (preferrable just 2) ways to enter income 1. Invoice+Payment 2. Sales Receipt 3. in a Deposit as a line item (not preferred)
I also said consult with his own tax CPA to determine if the applicable law allows this award to be booked over time. And to comply with both possibilities (by simply toggling between cash and accrual reporting depending on who wants to see what) I see an Invoice for the award as the solution to the cash income spread over 10 + years. Under PURE Cash rules one can not invoice anyone or enter bills for future payment so we use, as allowed by IRS, hybrid cash or whatever it is called. You know very well that in Cash P&L only actual "cash" received in any fiscal year is reported as income and so one initial Invoice followed by 10 or 11 payments. There can and is many times a difference between what income can be deferred based on fed or state so there exists the distinct possibility that regardless of being Cash basis (he said so) he might for state (and even local) have to report the entire award this year.
But he wants to see this award on his balance sheet. Not in so many words, but that would be the only reason to code it as an asset - which under Accrual would be correct as awards, lawsuits, etc either for or against should be posted as contingencies with notes on the financial statements.
It shouldn't be on the balance sheet under normal circumstances but it can depend on the audience. Maybe it is necessary on a BS for a bank to show viability due to this supposedly guaranteed future income. Certain "paper" for future payments can serve as collateral for loans but that collateral has to be on the books (or should be)