At the request of most Franchisors, revenue is reported on the day the sale is made, not when cash is received. This accounting methodology is called the “modified cash method” and ensures your books tie to your point-of-sale (POS) system. This approach requires the use of undeposited funds accounts, which represent sales for which deposits have yet to be made. Explaining the purpose of the undeposited funds accounts is best done through a walkthrough.
Every POS is a little bit different. In almost all cases though, you can find a report that summarizes sales activity over a specific period of time. These reports also summarize various payment methods related to the sales activity. Let’s dig into an example based on a sample daily POS report, shown below.
|Payment Type: Cash||$100|
|Payment Type: AMEX||$700|
|Payment Type: Visa/MasterCard||$930|
How Does This Activity Affect the Undeposited Funds Account?
Let’s look at the actual journal entry that gets posted to record sales activity for the day. You may not be an accountant or a debits and credits person, but the journal entry will help bring clarity to the matter. To keep things as simple and straightforward as possible, we've included a line item explanation to help explain what each line item is actually telling you.
|Service Sales||$1,000||To record sales|
|Product Sales||$500||To record sales|
|Sales Tax Payable||$30||To record sales tax collected by the business that will be paid to the state at a later date (typically monthly)|
|Accrued Tips Payable||$200||To record tips collected by the business that will be paid to employees at a later date (based on payroll cycle)|
|Undeposited Merchant Collections||$930||To record amounts owed to the business from the merchant processor handling VISA, Mastercard, Discover, Debit and ACH transactions|
|Undeposited AMEX Collections||$700||To record amounts owed to the business from the American Express merchant processor|
|Undeposited Cash||$100||To record amounts the business received from cash sales. These amounts should be deposited into a business bank account on a regular basis (ideally daily)|
To say this another way, the undeposited funds accounts are receivables on the balance sheet. They represent what is owed to the business related to sales transactions. Generally, you will receive a deposit from the merchant processor that will match your sales transactions for the day within one to three business days. American Express is typically a day or two slower. Lastly, the undeposited cash account represents cash sales. The only way this account is reduced is by making cash deposits with your financial institution.
To close the loop, let’s look at the journal entry associated with the receipt of deposits related to your sales activity.
|Undeposited Merchant Collections||$930||Deposit received related to sales with a payment type VISA, Mastercard, Discover, Debit, ACH|
|Undeposited AMEX Collections||$700||Deposit received related to sales with a payment type of American Express|
|Undeposited Cash||$100||Deposit made related to cash sales|
|Operating Account||$1,730||Total deposits hitting the operating account|
Understanding Deposit Reconciliation
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