Donatmontana
11-07-2006, 08:41 PM
My next question concerns what our company has termed a "nonrefundable deposit". I will repeat that we are on the cash basis of accounting. It appears to me to be very similar if not the same as our refundable deposits. Our refundable deposits cover stock boots on order from our manufacturer. If it takes too long, some customers want their money back, which we refund. Our nonrefundable deposits are for custom made boots, boots which we make from scratch in our manufacturing facility. We usually require 50% of the actual sales price as a nonrefundable deposit. So, on an $800 boot we would require a $400 deposit which we say is nonrefundable. We simply want to be sure that we have sufficient money on hand which covers our cost of making a boot in case the customer should decide he wants to back out on the deal either while we are making the boot, or after. It may be six months or perhaps a little longer sometimes before we actually start making a custom boot for an individual.
In cases where it has taken too long to get a custom boot made in the customer's opinion, we have still refunded their deposit back to them. So, I really don't see the difference between what we call a refundable deposit and a nonrefundable deposit. My question is, when do you think we should declare a nonrefundable deposit as income for IRS purposes?
This is what I see as an accountant, with no experience with nonrefundable deposits using cash basis accounting - until work is performed to make the boot, which could be six or more months from the time the deposit is received, rights to the benefits of the receipt of the deposit do not exist, no matter whether you call it nonrefundable or refundable. To record as income what our company terms a "nonrefundable deposit" at the time it is received simply doesn't make sense to me. From an accounting standpoint no expenses have been incurred against it, that is, no work has been performed to earn the right to the deposit, and, therefore, recording the deposit as income would distort the actual income earned for the period on our income statement. In addition, if half the sales price, the deposit, were recorded as income in one year, and then the expense of making the boot showed up the next year, plus the other half of the sales price, it would distort our income (less income reported than what should be) for that year as well.
However, cash basis accounting is not about matching expenses with the revenues generated from such expenses. Any input from anyone? Do you think we should record a nonrefundable deposit as income for tax purposes as soon as it has been received or wait until we have earned the right to the deposit?
In cases where it has taken too long to get a custom boot made in the customer's opinion, we have still refunded their deposit back to them. So, I really don't see the difference between what we call a refundable deposit and a nonrefundable deposit. My question is, when do you think we should declare a nonrefundable deposit as income for IRS purposes?
This is what I see as an accountant, with no experience with nonrefundable deposits using cash basis accounting - until work is performed to make the boot, which could be six or more months from the time the deposit is received, rights to the benefits of the receipt of the deposit do not exist, no matter whether you call it nonrefundable or refundable. To record as income what our company terms a "nonrefundable deposit" at the time it is received simply doesn't make sense to me. From an accounting standpoint no expenses have been incurred against it, that is, no work has been performed to earn the right to the deposit, and, therefore, recording the deposit as income would distort the actual income earned for the period on our income statement. In addition, if half the sales price, the deposit, were recorded as income in one year, and then the expense of making the boot showed up the next year, plus the other half of the sales price, it would distort our income (less income reported than what should be) for that year as well.
However, cash basis accounting is not about matching expenses with the revenues generated from such expenses. Any input from anyone? Do you think we should record a nonrefundable deposit as income for tax purposes as soon as it has been received or wait until we have earned the right to the deposit?