Announcement

Collapse
No announcement yet.

Negative Bank balance $31,000!

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Negative Bank balance $31,000!

    I have a client who has given me Balance sheet with negative $31,000 as bank! This crop has $21,000 loss in 2005. Client is on a cash basis.

    He told me he wrote checks at the year end and will clear next year!
    Thus he took deduction in 2005

    Here is what I found so far in my research:

    (1) Tell client to redate check for 2006 so that cash is positive. This would lead to 10,000 (cash would be zero) (31000 cash negative and 21,000 current loss) of profit

    (2) Move -ve cash into liability and call it "bank checking overdraft". Next month when money comes in it will correct Overdraft situation.

    (3) Because client is on a cash basis, he can take deduction when he pays amount and it is only timing issue? Or client is "creating loss"?

    Any other ideas?

    Thanks!

    #2
    Negative balance

    Originally posted by TAX
    I have a client who has given me Balance sheet with negative $31,000 as bank! This crop has $21,000 loss in 2005. Client is on a cash basis.

    He told me he wrote checks at the year end and will clear next year!
    Thus he took deduction in 2005

    Here is what I found so far in my research:

    (1) Tell client to redate check for 2006 so that cash is positive. This would lead to 10,000 (cash would be zero) (31000 cash negative and 21,000 current loss) of profit

    (2) Move -ve cash into liability and call it "bank checking overdraft". Next month when money comes in it will correct Overdraft situation.

    (3) Because client is on a cash basis, he can take deduction when he pays amount and it is only timing issue? Or client is "creating loss"?

    Any other ideas?

    Thanks!
    He "wrote" checks in 2005, did he mail them in 2005? He's claiming he floated $21K in checks into the new year, it will take at most a week for those checks to reach his account (probably less), where did he come up with the money to cover them so quickly after the new year?

    Sounds to me like he paid $10,000 in bills and the other $21K should not be posted until he has it covered with the cash. No tax return loss for that $21K, they are as you say overdrafts and cannot be considered payments on account. For cash flow purposes he may be showing overdrafts as you suggest in (2), but not for tax purposes.
    "A man that holds a cat by the tail learns something he can learn no other way." - Mark Twain

    Comment


      #3
      YE checks

      We had this issue not long ago. What I remember is that as long as all checks are mailed by 12/31/2005 and all checks will clear the bank (enough money in bank by then) the deduction is valid.

      You might want to try to find the previous post on this.

      A questions comes to my mind now. What if someone is dealing with a bank who establishes overdrafts for let say $5000 (some banks do), the checks wouldn't bounce either and should be legitimate, right?

      Comment


        #4
        I agree with Gabriele.

        Comment


          #5
          As a liability

          For presentation purposes, showing the overdraft as a liability is the correct presentation for the tax returns as well as for financial statements.

          Comment


            #6
            Common

            This scenario is probably more common that most would think. Especially with smaller clients. I simply record a liability labled 'Checks written against future deposits". Keeping in mind that floating funds is illegal but doesnt seem to deter many of my clients. I inform them of the liablilty but unfortunatly we simply have to account for it after the fact.

            Comment


              #7
              I believe the cash has to be there at the time the expense is taken.

              Comment


                #8
                It seems to me that the structure of the transaction from an accounting standpoint is no different than taking out a loan. You make a purchase and incur a liability. The guy writes a check knowing there are insufficient funds. He's basically writing himself a loan. I don't see it as being any different from any other kind of loan from an accounting standpoint. Messy? Dangerous? Ilegal? Unauthorized? Yes. But I don't see any of those factors affecting the accounting treatment.

                I would, however, be very careful as a practitioner in getting involved with something that messy. Make sure you're not in the position where people come and start asking you questions about why you did this and that.

                Comment

                Working...
                X