Client Funds

Lovejoy

We sell products on behalf of our clients and retain the funds untill the end of each month when we make a direct bank transfer to their bank accounts. This money is not our income, we simply hold it on their behalf. How do I code this income in our chart of accounts?

Mikeg

Lovejoy,
You will need to create 2 accounts on your chart of accounts. A cash account "Client Funds Held in Trust and a short term liability "Client Funds Payable". Here is how it would work. You receive 5,000 for product sales of which 4000 belongs to clients. On your transaction register you would have a deposit of 5000. Split the deposit by coding 1000 to Sales (income statement) and 4000 to Client Funds Funds Payable. I'm assuming that all funds are deposited into one account and then client amounts are transferred. Transfer 4000 from operating account to Client Funds Held in Trust. If that was the only transaction your accounts would look like
Cash - Operating 1000
Client Funds Held 4000 (a)
Total assets 5000
Client Funds Payable (4000) (a)
Profit year to date (1000)
Total liab and capital 5000
(a) Should always agree

When you pay the client their payout (I'm assuming you transfer back)
Transfer 2000 from Trust account to operating or journal entry looks like:
Debit Cash - Operating 2000
Credit Client Funds Held 2000
When you cut the check from operating account (importing transactions)
Code the disbursement to Client Funds Payable or the journal entry would look like:
Debit - Client Funds Payable - 2000
Credit - Cash Operating - 2000

Hope that helps
Mike G, CPA
www.mgfinancial.net