Query on free services provided entry

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

24 December 2016 Hi experts

ABC Ltd. raised an invoice for Rs. 10,000/- on XYZ (firm-Franchisee of ABC Ltd) and XYZ need not to pay this amount to ABC Ltd as per policy.
Further, XYZ firm is also providing free services for the same amount to its customer ie: Rs. 10,000/-

What accounting entries should be passed in the books of XYZ firm.

Pl. explain the same with reasons to clear my doubts

Thanks

Querist : Anonymous

Querist : Anonymous (Querist)

26 December 2016 Hi experts

Looking for prompt reply on this.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

10 August 2024 To properly account for the transactions involving free services and invoice adjustments, you should follow these steps:

### **Scenario Overview:**

1. **Invoice Raised by ABC Ltd.:**
- ABC Ltd. issued an invoice for Rs. 10,000/- to XYZ (franchisee), but XYZ does not need to pay this amount due to a policy.

2. **XYZ Providing Free Services:**
- XYZ firm provides free services worth Rs. 10,000/- to its customers.

### **Accounting Entries for XYZ Firm:**

#### **1. Recording the Invoice from ABC Ltd.:**

Since XYZ is not paying for the invoice due to a policy, you will need to recognize the expense and the related liability.

- **Date of Invoice:** When the invoice was raised.

**Entry:**
```plaintext
Expense Account (e.g., Franchise Fees or Purchase Account) Dr 10,000
To Accounts Payable (ABC Ltd.) Cr 10,000
```

**Reason:** This entry records the liability to ABC Ltd. for the invoice amount and acknowledges the expense incurred.

#### **2. Adjusting the Liability (since XYZ does not need to pay):**

If the policy states that XYZ does not need to make the payment, this should be adjusted in the books. This can be done either through a discount or a direct adjustment.

- **Adjustment Entry:** (Typically, this would be confirmed with ABC Ltd. and might involve an adjustment or credit note issued by ABC Ltd.)

**Entry:**
```plaintext
Accounts Payable (ABC Ltd.) Dr 10,000
To Expense Account (e.g., Franchise Fees or Purchase Account) Cr 10,000
```

**Reason:** This entry clears the liability as XYZ is not required to pay the amount, adjusting the previous entry.

#### **3. Recording the Free Services Provided to Customers:**

Since XYZ is providing services for free to its customers, you need to account for this as a cost or expense, as it represents a value given away without any revenue.

- **Date of Service Provision:** When the services are provided.

**Entry:**
```plaintext
Free Services Expense (or a similar account) Dr 10,000
To Service Revenue (or a similar account) Cr 10,000
```

**Reason:** This entry recognizes the value of the free services provided, which can be accounted for as an expense or as a reduction in revenue, depending on your accounting policies.

### **Summary of Entries:**

1. **Recording the Invoice:**
```plaintext
Expense Account Dr 10,000
To Accounts Payable (ABC Ltd.) Cr 10,000
```

2. **Adjusting the Invoice (No Payment Required):**
```plaintext
Accounts Payable (ABC Ltd.) Dr 10,000
To Expense Account Cr 10,000
```

3. **Recording Free Services Provided:**
```plaintext
Free Services Expense Dr 10,000
To Service Revenue Cr 10,000
```

### **Additional Notes:**

- **Policy and Agreements:** Ensure that any adjustments or accounting treatments are in line with company policies and agreements with ABC Ltd.
- **Documentation:** Maintain proper documentation for these entries, including any communication with ABC Ltd. regarding the invoice waiver.

These entries will help ensure accurate accounting and reporting of the transactions related to free services and invoice adjustments. If you need further clarity, consulting with a professional accountant can provide additional guidance tailored to your specific situation.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now