Treatment of expenses as prepaid or periodic


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Hi,

I am trying to come up with an appropriate treatment for funds that are allocated to my company by the city government. The employees working at my company are city employees and are paid by the city.

My company is allocated a certain amount of funds every year. Before we receive the payment for our allocation the city deducts the salaries/benefits/taxes for their employees based on the annual FTE's.

My question is to what is the appropriate treatment for the salaries.

I'm thinking of recording the full allocation in deferred revenue and offsetting that entry with an accounts receivable and a prepaid expense entry.

As the salary expense is incurred I will credit the prepaid and debit the deferred revenue to realize revenue.

J/E
(1)

Debit Credit
Accounts Receivable 1,000,000
Prepaid Expense 1,000,000
Deferred Revenue 2,000,000

(2)
Salary Expense 10,000
Prepaid Expense 10,000

Deferred Revenue 10.000
Grant Revenue 10,000

One of my colleagues suggested that doing so inflates the balance sheet and offered another method.

Instead of recording the deferred revenue, prepaid expense and receivable from the city. We should only record the expense as incurred and realize the revenue against the expense. Since there is no money going out, the expense and revenue will offset each other.

For expenses that are paid out of cash, we would record the expense against the payable and record the revenue against accounts receivable.

Any thoughts on the two treatments would be appreciated.

Thanks
 
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bklynboy

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Unless I am missing something you say the employees are city employees and not youor companies. Why record any salary expense if this is an expense of the city and not yours?

Can you be more detailed on this arrangement? Does the city act as your paymaster and your company has hired the employees? Who covers the FICA/OASDI company match - your company or the city? Who provides employee benefits?
 

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