Accounting for deposits in advance

Accounting for deposits in advance

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We have a client who provides a service, but takes a deposit as much as 24 months in advance of the event in question.

They have a contract which states after seven days, the 25% deposit which they take becomes non-refundable.

Obviously, I understand that normally you would treat the deposit as held in advance until the event is performed (subject to any costs incurred).

My question is two-fold:

1 - Does the fact the deposit has become non-refundable change the deposits in advance rule?

2 - With regards costs incurred, our client has purchased a number of additional items, which will be treated as plant, to cope with the additional demand they are now discovering - whilst this is not a P&L charge, could an element of the cost be offset against the deposits figure?  i.e. if the total deposits are £50,000, but they have purchased plant to cope with the additional demand of £30,000, can any element of that be used against the deposits in advance?  The assets will be used for future events outside the ones which they are holding the deposits for.

Any help you can give me would be much appreciated.

Thanks

Replies (9)

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By johngroganjga
05th Nov 2014 10:35

I think you hold them as deposits on the balance sheet until the earlier of:

the cancellation of the event by the customer resulting in forfeiture of the deposit;the completion of the event

Nit sure what you are asking about the related capital expenditure.  Please clarify.

Thanks (1)
Stepurhan
By stepurhan
05th Nov 2014 10:41

Plant costs

Whilst specific events may have triggered the desire or need  to expand capacity, plant is purchased for ongoing use in the business. The plant is not acquired for the specific event, and will continue to be used for future events, so is a general business purchase. Any tax deduction therefore follows normal capital expenditure rules.,

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By AccountancyMarket
05th Nov 2014 10:46

I would recognise the 25% after 7 days

Revenue for provision of services is recognised when it is probable that an economic benefit will flow to the entity and the revenue and costs can be reliably measured.

I would argue that the 25% is much more than probable after 7 days, and would book this as revenue. The remaining 75% would remain on the balance sheet.

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Replying to SXGuy:
By johngroganjga
05th Nov 2014 10:51

75%?

AccountancyMarket wrote:

The remaining 75% would remain on the balance sheet.

What 75%?  We are told that the customer pays a 25% deposit.  That is all there is to account for.

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Replying to SXGuy:
By johngroganjga
05th Nov 2014 10:55

Costs

AccountancyMarket wrote:

I would argue that the 25% is much more than probable after 7 days, and would book this as revenue. 

If you do this you should also provide for 25% of the costs of putting on the event. Otherwise, when the event comes round you will be setting 100% of the costs against only 75% of the sales revenue.  Hence my suggestion above.

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Portia profile image
By Portia Nina Levin
05th Nov 2014 10:53

I agree

With the first two responses, but disagree entirely with the third, which is inconsistent with application note G to FRS 5.

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Portia profile image
By Portia Nina Levin
05th Nov 2014 11:01

The point is

That whilst the contract state the deposit to be non-refundable, if the supplier fails to put on the event, the customer is entitled to their money back.

Thanks (3)
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By AccountancyMarket
05th Nov 2014 13:45

Apologies

Completely misread the question!

Please do ignore my response - i won't read & reply in such haste in future.

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By cmclaren1978
05th Nov 2014 13:46

Thanks all.  The recognition

Thanks all.  The recognition of income when the event takes place/when the event is cancelled makes sense to me, and the treatment of the plant also ties in with my thoughts - but was just checking if I had missed something.

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