Recently, I have received an interesting question on email. Normally, I do not have the time to answer the questions because I have lots of big resource of 3000+ contents where you can find all most all the questions. Second, I am so much busy for other so much important project. After requesting, I have given the answer and ready to share with you.
Question : 1.
Our company has a funny way of paying air tickets to the permanent staff. We accrue the amount of the ticket on a monthly basis and then in June we pay the whole amount and then the balance is treated as a prepayment. the air tickets are accrued on a monthly basis for the first 5 months from Jan to May and then its paid out for the whole year in the month of June. After that the balance portion from July to Dec is treated as a prepayment and transferred to a specific account that goes to the Balance Sheet.Why does this have to go to the Balance Sheet ? Its an expense it should go to the P&L correct as the P&L records all expenses.
Because we have paid advance expenses but still we did not receive the service of our expenses. It means, it is the part of our asset. Our bank balance was decreased but no asset come in our pocket. So, physical documents of advance payment will be become the proof of our asset. In future, if we will not get service, we can go to court and complain either of getting service or refund of our service. So, it is necessary to show it as proof in the balance sheet.
I thank you for responding, however in this case its an employee expense that has been paid namely air tickets. Its part of the employee's benefit or entitlement which he has received. Moreover this has been mentioned and agreed upon by the employee and company at the time the employment agreement was signed.
Therefore, its a liability to the company as they are not really receiving any benefit in return. So again should this not be part of Income statement at the time when then tickets were paid out as its an expense / liability?
O my lovely dear,
First of all the salaries + benefits to employee is the expense. If company does not pay on due date, it is the liability of company. Because as per your question, company has bought air tickets for you before the due date and before the due date it must be the asset of company because you did not provide the service from july to dec. but pocket of company has decreased. Instead of paying the air ticket, company can use same money for Fixed deposit in bank and earn interest on same amount. So, it is the asset. If you will not do the work, you are liable to pay the amount of air ticket.