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Receiving payments on behalf of clients.

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Contributing Cover User nm_service
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Receiving payments on behalf of clients.

Dear Forum, 

 

I work for a small company that provides office space and administrative support (including billing services) for clients. The company collects payments on  behalf of the clients into a Client Holding Account and periodically transfers these funds to the client less a service fee (for which the client receives a tax invoice).

 

I’m confused as to how to set up the accounts for this. So far I’ve created a bank asset account “Client Holding Account” into which funds are deposited and a liability account for each client (to record collected funds owing to each client). When funds are received on behalf of the client they are recorded using “receive money” into the holding account and recorded against the liability account for each client.  When clients are paid, the reverse is done using “spend money”.  However, when I do this I transfer the full amount to the client in the spend money entry, however the actual bank transfers record a transfer for the service fee into the operating account for the company and the remainder to the client, which makes reconciliation messy.

 

Is this the correct way to do this or are there better ways to structure the accounts or record the transactions to make reconciliation and reporting less complex?

 

Many thanks.

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Ultimate Partner Murray_McKenzie
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Re: Receiving payments on behalf of clients.

You could probably do this in several ways. Here's how I would do it

 

1) when receiving payments on behalf of clients, credit it to an income account, probably using one in the 8-xxxx section to distinguish it from your operational income. It's actually a liability to you at this point, but I'd use an Income account for reporting purpose as below. Have a Job for each client and note that job on the payment

2) when making a disbursement to the client, expense it against a 9-xxxx account, also using the same Job, and at that point adjusting for your fee. It would look like this

     9-xxxx   Disbursements to Clients       $1,000

     1-xxxx         Bank Account                                                  $900     Job A

     4-xxxx        Fee income for handling client payments    $100      Job A

 

You can then use job reporting to ensure that monies are correctly accounted for. All jobs should end with a zero balance

At balance date you will want to adjust for monies held by adjusting any balance held out of the income account to a liability account

 

NOTE - the monies received on behalf of your clients is technically a liabity, I have used Other Income and Other Expenses sections in this example so that Job reporting will work as a check on this. If Asset/Liability accounts are used , job reporting won't show the results.

 

Murray McKenzie
B.Com
IRD Registered Tax Agent
Boots 'n All Ltd
Contributing Cover User nm_service
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Re: Receiving payments on behalf of clients.

Dear Murray,

 

Thanks very much for your detailed and prompt reply. Just one question if I understand you correctly - at each reporting time you would move the retained funds from the Other income account into a liability account run the report and move it back - just a journal tansfer?

 

Many thanks again.

Ultimate Partner Murray_McKenzie
543 Posts
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Re: Receiving payments on behalf of clients.

Technically correct accounting would have you journal any funds held on your annual balance date as you've suggested. I would also check with your accountant when to recognise the income portion of funds held on behalf and not yet disbursed i.e. you may choose to only adjust for the portion that will get paid to the client and leave the amount equivalent to your service fee in the income account.

Whether to do this more often, like monthly, is really a matter of how you are using reports. One of the reasons I suggested using the 8-xxxx and 9-xxxx sections was to show client funds outside of the normal P&L reporting.

There are, as usual, a number of ways to do this and exactly how depends on the specific outcomes you want

Short answer is yes, an equal and opposite pair of journal entries one on balance date and the reversal the next day.

 

Murray McKenzie
B.Com
IRD Registered Tax Agent
Boots 'n All Ltd
Contributing Cover User nm_service
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Re: Receiving payments on behalf of clients.

Thanks very much again, works well.

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