I have a 60m service contract recorded as a liability in Manager and Monthly payments recorded as expenses. However I have just terminated the contract early by paying an agreed fee which does not equal the full price of the contract.
How can I now record the contract cancellation fee and remove the contract from my liabilities?
Do anybody have any ideas?
Thanks in advance.
The cancellation fee is a payment that you deduct from the liability. bank (BS) vs liability (BS)
The difference is a contingency (an unexpected income) in the P&L that will close the liability. Based on your legislation you will either have it fully deducted in the current year or splitted in more years (usually the residual duration of the contract). contingent income (P&L) vs liabilty (BS)
Let us separate Manager procedures from other accounting issues.
As @Davide wrote, the cancellation fee should be recorded as a payment (it will be credited to a bank account and debited somewhere). But the debit account selection will depend on local law and the terms of your contract. It might be debited against the liability account, if you were legally obligated to pay for the full 60 months of service. But it also might be considered a current expense.
If debited against the liability account, the fee might or might not be fully allowed in the current year. Again, this is a matter of local law.
The question of what to do with the remaining balance of the contract also depends on whether you were legally required to pay. If so, the forgiven debit would normally be classified as income, as @Davide described. If not, however, there might just be a credit elsewhere, probably to an appropriate equity account (depending on your legal structure) to balance the debit of the remaining balance.
It is also worth mentioning that, if you were not legally required to pay for the full 60 months of service, there is a question as to whether the full contract amount should ever have been shown as a liability in the first place. This situation is one where the advice of a qualified local accountant would be helpful. Forgiven debts can be tricky accounting situations. The transaction recording in Manager is quite simple, whatever the answers.
Thank you to both @Tut and @Davide.
Seems the issue is more complicated than I thought and I don’t know the answers so will do as you advise and talk to an accountant on the legal aspects.
How did you initially set up this liability (what transaction created it) ?
If you have a balance after the cancellation fee, then potentially that balance removal could be a reversal of that initial set up.
It was created by a Journal entry, I have since reversed it to deal with the problem as advised by my accountant. Thanks for trying to help.