Account receivable treatment

Account receivable treatment

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Hi all,

I have a concern relate to the treatment for trade receivable and need your help. My company provides advertising service for some customers and always has a separate contract for each time. We use usually require customer to advance a certain percent of contract value before work carried out and when the work completely done we invoice customer with the total contract value. So at the year endwe have both debit and credit balance  for each customer.

Is it reasonable for us to net off such balances together and just present a ultimate debit or credit balance for each customer? 

 Please provide the regulation/standard that specifics the guidance for this issue (if any).

I really appreciate for your help.

Replies (12)

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By User deleted
04th Sep 2014 07:37

You cannot net off assets and liabilities unless a) you've a legal right to do so e.g. your customer asks you to do so, or b) permitted by the accounting standards (IAS 1.32, FRS3 which is roughly equivalent to IAS1). None of these seem to apply in your case so you can't net if off.

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Replying to johnhemming:
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By levantan
04th Sep 2014 09:32

Thank for your help. I also thought like you. Beside your idear, I also think the receivable and advance balance from th same customer has difference subtance. Receivable balance is a monetary item but advance amount is not ( IAS 21). And in case that balance is not same as reporting currency, the treatment at as reporting date for two items is also different e.g, monetary item use the closing rate whilst the non-monetary uses the exchange rate at transaction date. So, it is in appropriate to net off two item that difference in nature. 

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Replying to Waves:
By johngroganjga
04th Sep 2014 12:07

Monetary item

levantan wrote:

Thank for your help. I also thought like you. Beside your idear, I also think the receivable and advance balance from th same customer has difference subtance. Receivable balance is a monetary item but advance amount is not ( IAS 21). And in case that balance is not same as reporting currency, the treatment at as reporting date for two items is also different e.g, monetary item use the closing rate whilst the non-monetary uses the exchange rate at transaction date. So, it is in appropriate to net off two item that difference in nature. 

Puzzled.  If the credit balance isn't a "monetary" item, what kind of item is it?

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By johngroganjga
04th Sep 2014 07:56

Disagree.  Common sense comes

Disagree.  Common sense comes first.  It would be absurd to show your clients' part payments as a liability and the debts due from them un-reduced by the part payments they have made.

Of course you net off.

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Replying to Accountant A:
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By User deleted
04th Sep 2014 08:04

Not about common sense

johngroganjga wrote:

Disagree.  Common sense comes first.  It would be absurd to show your clients' part payments as a liability and the debts due from them un-reduced by the part payments they have made.

Of course you net off.

OP is not asking for a common sense answer. Whilst the person is the same the debit and credit are for different projects

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By johngroganjga
04th Sep 2014 08:14

That's not my reading of the OP's explanation.  The creditors are part-payments received against the invoices in debtors.

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By User deleted
04th Sep 2014 09:34

I agree with John.

Payment is on account - therefore offset

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By The Limey
04th Sep 2014 10:34

I'm going to disagree with you all on this one.

 

The correct accounting should surely be that for a long-term contract (with percentage of completion accounting). SSAP 9 sets out the accounting for long-term contracts, and Appendix 3 in particular gives the details of how to deal with debtor balances for invoices, etc.

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By TerryD
04th Sep 2014 11:16

Quite so, Limey - but that wasn't exactly the question. If we are assuming (and, admittedly, the question does not clarify this) that the debit and credit balances in question relate to the same contract, then the debit balance can only be an "Amount Recoverable on Contract" since no invoice will have been raised yet. So the answer is clearly - yes, offset. (Note, however, that SSAP 9 doesn't actually apply - he's using those infernal international thingies)

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By levantan
05th Sep 2014 03:08

This is the extract from IAS 21 paragraph 16 "the essential feature of a non-monetary item is theabsence of a right to receive (or an obligation to deliver) a fixed or determinablenumber of units of currency ". In this case, we have an original liability of renderring the service to customer, not refund cash to them (only in case of not fullfill the contract requirements). So, for me the advance from customer balance is non-monetary item. 

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By johngroganjga
05th Sep 2014 06:18

I think you are over-thinking this, and as a result you are not seeing the wood for the trees.

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By johngroganjga
06th Sep 2014 20:23

Of course the payments on account you receive from your customers are monetary amounts. Either you have to repay them if you don't fulfil the contract. If so, the amount you repay is a fixed monetary amount. Or you give credit for the payments against your final invoice. If so, the amount of the credit you give is a fixed monetary amount.

On the question as to whether you have one balance or two separate ones think of it this way. If your customer sued you recover his payments on account after you had completed the contract and raised your final invoice would you pay? Of course not. If you sued your customer to recover your gross final invoice without deducting the payments on account he had already made would you expect him to pay? Of course not.

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