At a recent “20 Group” meeting in which I’m involved, a heated discussion took place over how to account for a sale that hadn’t been fully approved for the final amount. We’ve all been there: We call an adjuster to come back out to approve a supplement and they give the dreaded, “Just do what needs to be done and send it to me and I will approve it.” So you write the sheet for “what needs to be done,” print the final bill for $1,100 and send the satisfied customer on their way – only to get the final approved paperwork back from the adjuster with $45 fewer dollars due to “estimating system differences.”
So how do you account for the $45? Was that a sale or not? Legally, a sale is an agreement where one party (the seller) transfers something to another party (the buyer) for an agreed price. Consent of the parties is also required and is generally evidenced in writing. But what is the agreed price? Did it include the $45?
ABC Body Shop would have delivered the job, closed the repair order and booked the sale as $1,100. When the payment from the insurance company comes in for $1,055, ABC will discount the sale and write-off the $45. That way ABC can track the amounts being written off.
123 Body Shop will hold the repair order open and close it only once the final estimate comes back for $1,055.
What is the difference between the two ways of handling this? The net result is the same if there is no sales tax involved. But if there is sales tax included in that $45 difference, ABC would have likely remitted the sales tax but not collected it, resulting in a loss to the company. The argument could be made, however, that the agreed-upon sale was $1,055 meaning that the $45 difference could be recorded as a credit memo reducing both the sale and the related sales tax, again recording a net sale of $1,055 with no loss due to sales tax.
So what is the proper way to handle other types of sales adjustments? When the shop owner tells his estimator to give his friend $100 off the repair, a discount should be recorded as a sales adjustment, which appears as a negative revenue account. Redeemed coupons generally get recorded the same way.
What about those small balance write-offs? If you decide not to collect those small differences at the time of the sale, they can be written off also as sales adjustments. In the event that you have recorded a sale but have been unsuccessful at collecting the balance, the write-off should be recorded as a “bad debt expense.” The difference is that sales adjustments get made at the time the sale is recorded, whereas the bad debt write-off gets recorded well after the sale occurred.
Some shops estimate the amount of bad debt they expect to write-off in a year using an “allowance for uncollectible accounts” contra asset account that reduces the value of “accounts receivable” on the balance sheet. While this is appropriate for GAAP-based financials, the IRS generally does not recognize such allowance accounts and allows deductions for actual write-offs only.
Another common mistake I see is shops recording a sale and writing it off for internal repair orders and warranty repairs for which no payment will be made. If no one agreed to pay for these repairs then there is no sale. Again the shop may mistakenly remit sales tax on the “sale” when no sales tax was collected.
Two last items of note: First, for cash basis tax-payers, write-offs are a non-issue because a sale is only a sale when the payment is received, not when the vehicle is delivered.
And second, dates are important. Write-offs should generally be recorded in the month you are doing the write-off; no back-dating to a prior period.
The bottom line is that a “sale” should only be recorded for a legitimate sale. If you have questions about recording sales and sales adjustments in your state, check with your CPA.
