I'm the treasurer for a small non-profit. I'm sorry, but I just cannot figure out the adjusting journal entries for the following scenario. We do not use a payable account - our purchases are all paid in cash. Seven months ago we paid a group of invoices for services to be provided over 3 years. The one invoice in question was for $335. When it was paid, it was recorded to a prepaid expense account. Over 7 months we expensed $65 on this invoice, leaving a balance in the prepaid account of $270. Our vendor wanted to cancel the original invoice and replace it with a service contract more advantageous to us financially. So they issued us a credit memo for in-store credit, not for the unused portion but for the entire $335! They subsequently reduced that credit by $272 dollars for the new service contract, which leaves us with $63 to be applied to a purchase at a future date. If they had refunded only the unused $270 balance, my journal entry would be easy. As it is, I am stymied. I need to keep my prepaid recon in balance and have no idea what adjusting entries to make. I came out of retirement after 15 years to help out this young non-profit, and I'm afraid I'm a bit rusty. Any assistance would be greatly appreciated (and I have the feeling that as soon as I post this I will have the light dawn and it will be one of the "Well, Duh!" moments). Thank you.
Recording cancelled prepaid service contract for which we received full refund.
Answers
Hi,
Interpreting your question, I am listing down below mentioned points:
1. You do not use any payable accounts. All the bills are paid in cash upfront.
2. You have had contract with a vendor for $335 for a service adhering for 3 years. The entire invoice of $335 is paid and the balance was recorded to Prepaid. As and when you obtain any service, you expense some balance out of the prepaid. Over a period of 6 months, you expensed $65.
3. The agreement is now revised by the vendor with some new clauses. However when the agreement is revised, the financial terms are not changed. The total value of the agreement is $335 only. So you do not owe the vendor anything now. As far as financial transactions are concerned, I dont see any financial transaction with the updated contract except the service level agreements unless if i am missing anything.
The only financial aspect i see is they have changed the amount of utilized portion from $65 to $63. But you still do not owe him anything. Its just your new prepaid expense balance on that day should be $272 instead of $270. So you can simply post a general entry as Prepaid Exp Account Debit $2 and Expense Account Credit $2 as on the date of revised agreement with a documentation reference of revised agreement and the credit.
Technically for vendor, its a new agreement of 29 months (3 years less 7 utilized months) with a value of $272 and $63 is the past revenue. Same goes reverse for you that $272 is the prepaid for next 29 months and $63 is past expense and thus you need bring down your expense account from 65 to 63.
Because the credit that the vendor gave you is not a credit to bring down your payable balance. That's just a credit to the revised agreement.
So, just one entry as given above can do your job.
Let me know if this helps or f you have any additional question.
1
This makes sense. I hadn't thought of the contract as being revised so much as being canceled and replaced with a new one. The other part that was throwing me was the in-store credit of about $63 that we still have, but if I'm not recording the credit memo, I have no need to record that, either. Yes, I can make this work. Thank you so much!
You're welcome!