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How to enter a lawsuit settlement paid over time

Forum|Forum|7 years ago
October 31, 2018
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I settled a lawsuit for an amount of money spread over 10 years with a large initial payment and the rest paid monthly. It will be considered income and I'm on cash accounting. I'm not going to use actual numbers but these are representative. The settlement amount is let's say 200,000 and the initial payment is 100,000 received mid year. I want to show the 200,000 as an asset with the payment against that asset of 100,000 as cash income for this year. The remainder should be on the balance sheet as 100,000 asset. I have added an account on the chart of accounts for the settlement asset account as an "other asset" which I thought would act like Accounts Receivable. I did a journal entry for the 200,000 crediting other income and debiting settlement. I then did a journal entry for the initial payment (100,000) crediting settlement and debiting the checking account. That is what I expected to show up on the profit and loss when cash accounting was selected but instead the entire 200,000 shows up. how do I get it to work in cash accounting?

QuickBooks Online

Best answer by john-pero

This "a journal entry for the 200,000 crediting other income" is why. JE's bypass accrual vs cash.

You can use a JE to create the receivable asset but not against income. Income happens as the note is depleted. I know you want the remaining balance to show as an asset on the balance sheet .

Back up and start over. "Sell" the settlement on an Invoice as other income for $200,000. Only the $100,000 actually received (as Receive Payment) will post as cash basis income this year.

To get the remaining 100k onto the balance sheet create a customer credit memo (same name as the payee) for 100k posted to an Other Asset account. Now going forward issue an Invoice as often as scheduled payments are posted as a reduction of the asset. What about income? I am getting to that. With a remaining balance of 100k on original invoice, and a new invoice for 10k for asset reduction, apply a portion of the 100k customer credit to that invoice and post received payment against the original invoice which will post as cash income when received.

Now those are the mechanics of it, I want you to review the process with your tax CPA to ensure that you can defer the income as payments are received. Just because you and I can agree that it should be so does not always mean the IRS will agree.

john-peroAnswer

This "a journal entry for the 200,000 crediting other income" is why. JE's bypass accrual vs cash.

You can use a JE to create the receivable asset but not against income. Income happens as the note is depleted. I know you want the remaining balance to show as an asset on the balance sheet .

Back up and start over. "Sell" the settlement on an Invoice as other income for $200,000. Only the $100,000 actually received (as Receive Payment) will post as cash basis income this year.

To get the remaining 100k onto the balance sheet create a customer credit memo (same name as the payee) for 100k posted to an Other Asset account. Now going forward issue an Invoice as often as scheduled payments are posted as a reduction of the asset. What about income? I am getting to that. With a remaining balance of 100k on original invoice, and a new invoice for 10k for asset reduction, apply a portion of the 100k customer credit to that invoice and post received payment against the original invoice which will post as cash income when received.

Now those are the mechanics of it, I want you to review the process with your tax CPA to ensure that you can defer the income as payments are received. Just because you and I can agree that it should be so does not always mean the IRS will agree.

B

billpennockAuthor

in regard to your original suggestion. "sell the 200k in an invoice", then you say "to get the remaining 100k on the balance sheet". Wouldn't it already be on the balance sheet when reported as accrual?

qbteachmt

I don't understand this part: "Back up and start over. "Sell" the settlement on an Invoice as other income for $200,000"

Putting an Other Asset item onto an invoice (AR is also an Asset) is Backwards. This isn't AR and it isn't Sales.

Are you a Cash or Accrual Basis reporting entity? Why would you want to show the entire $200,000 anywhere, if you have not yet received it? Who told you the entire settlement amount is a Factual Accounting Value to be entered now?

B

billpennockAuthor

Thanks to you both. I had actually just gotten away from the whole invoicing method because the way I did it made it look like sales. While the settlement was over work not paid for it was work done several years ago and at this point those invoices were written off and the amount was not consistent with them anyway.

Regarding entering the whole amount it is an amount owed to the company therefor, much as if the company would have loaned the amount, it is an asset of the company. As the balance is paid there will be an amount of the asset left and it would be nice, but not strictly necessary I suppose, to have that number available on the balance sheet. We are cash accounting for tax purposes so the only income that should be shown on taxes is the amount received.

john-pero

"work not paid for it was work done several years ago and at this point those invoices were written off"

that would have constituted the exchange of one asset (A/R) for another but under cash accounting A/R is not a true asset and a write-off in the past would not have affected cash basis Balance Sheet.

So you have realized, just record the income as income as it comes in - but I still recommend using a Sales Receipt or Deposit and not a Journal Entry.

My final thought on Invoicing is, do you have to submit any paperwork to get this payment each year? Will you maybe in year 5 have to sue them all over again because they have stopped paying? That i n my view would call for invoicing to prove the debt.

qbteachmt

Running the business on Accrual Basis for reporting and management is not the same as making or not making entries for Cash Basis.

To make an entry that Accrues the entire amount in Other Asset, your offset is Income; but this is not yet income. Debt owed to your business is not income until it comes in, for cash basis. If you are trying to show someone is in debt to you, but you did not Pay Out any money or sell them a fixed Asset, you really do not want to see the full balance owed to you as Income, already. That is Unrealized and bad for the accounting. That is Law Contract Settlement activity; not your actual financial entry.

"I did a journal entry for the 200,000 crediting other income and debiting settlement."

And doing JE bypasses Cash Vs Accrual Basis reporting, so that is the Worst thing to do, for "I want Other Asset offset as $200k income, even though no money happened."

You likely need to take this to your CPA, off the internet.

B

billpennockAuthor

I understand accrual vs cash. I want to show the total remaining owing to me on the balance sheet in accrual format. I understand that it will not show in cash format as owed money is not cash, AR doesn't show on the balance sheet for cash either right? So showing the books in cash is for tax purposes because that is how I elected to be taxed and it's legal. Showing the books in accrual is for me to manage cash flow and loans and forecasts and planning, etc. The thing I've learned here is that journal entries don't respect cash vs accrual which is disturbing because it would be easy and obvious but that's the way it is so I have to live with that.

qbteachmt

You are countering your own comment: "I want to show the total remaining owing to me on the balance sheet in accrual format."

That means you intend to enter Income.

"I understand that it will not show in cash format as owed money is not cash"

That's Not Correct for what you are proposing to do. It Shows.

"AR doesn't show on the balance sheet for cash either right?"

What you have confused is Accounting and Functions. AR Functions of invoices and payments and credits memos are properly honored by the program's interface for Proper reporting basis. Your JE is always going to show.

You just Bypassed Cash vs Accrual Basis.

"The thing I've learned here is that journal entries don't respect cash vs accrual which is disturbing because it would be easy and obvious but that's the way it is so I have to live with that."

What you are proposing to enter as if that is Actual, is something called Unrealized.

Again, I recommend working with your own CPA on this, before you make a bit of a mess in the accounting for something you want to Document, that is not Actual, at this time.

T

toure-boubacarsb

Ulster Bank statement to me 9th July is OK 👍 👌 🙆‍♂ 9C the invoice will have been a little busy

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