Hi Brucanna, our Financial Department has discovered that a few customers had directly paid their invoices to an official, but the official did not submit those payments to our Financial Department. The official has made the statement that they will pay back the money in a month.
How do you enter the data for the stolen money from customer payments and the money promised to be paid back in a month time?
Also in the worse case scenario, if they fail the promise to pay back in a month time, what to do with the Customer accounts?
You could create a Customer in that person’s name and transfer the affected Customer Invoices to them.
Then you could write off the unpaid balance from that persons account to a P&L expense account called “Bad Debts”. Also, I would “consider” reporting it to authorities regardless if it’s paid back or not.
No doubt, you want your customers’ accounts to be clean and accurate. You also want to be in a strong position in the event of an audit. Depending on the magnitude of the stolen payments, claiming them as a deduction of some type could significantly increase your risk of audit. And if you are a company required to undergo audit, you need to be able to convince your auditors that you are accurately reporting your performance and position. That means having a clear trail to explain what happened. With those goals in mind, these are the steps I would take:
Report the theft to authorities. This may be uncomfortable, especially if the official is a shareholder or partner. But you must consider whether that person can ever be trusted again. If things go poorly and this individual does not make good on the promise to repay, your report is the primary defense you will have that you are not engaged in financial or tax fraud. You must protect the company.
Assuming you have proof customers made their payments (getting it from the customers, if necessary), enter the receipts against the sales invoices as you normally would. Don’t complicate customers’ accounts because of your internal problem. Enter this transaction as a journal entry, debiting an asset account and crediting Accounts receivable. The transaction keeps the amount in the Assets group, but cleanly separates your customers from this other problem. Later, the account can be marked as inactive. Be sure to document the reason for the transaction with supporting information.
If the person who stole the money is an employee, immediately offset whatever you can against what you might owe him/her in Employee clearing account. This person has already had the use of your money for some time. Why prolong the payback?
If and when payback is made, record a bank transaction, debiting your bank account and crediting the asset account where you transferred the money originally.
Having said all that, you may decide to consider humanitarian aspects of the situation. Why was the money stolen? If you are convinced the official “borrowed” the money because of some personal emergency and intended to pay it back, you might decide instead to treat the money as an employee loan. In that case, you might decide to skip Step #1. But I would still document the circumstances in the employee’s personnel record in case the situation is repeated. Step #2 would still be advisable, but rather than debiting the asset account I mentioned, debit the Employee clearing account (assuming an employee), annotating the transaction as a loan. This will reduce the amount you owe the official for such things as payslips. If the official is a capital account member, credit Capital accounts and the member’s Drawings subaccount. In that situation, you are treating the situation as an unplanned withdrawal of capital from the company.
Thanks for your reply. He had been fired from our company. He had threatened the customers and covered up with lies and deception. Our Board of Directors has decided not to report it to the authorities yet, but to solve this issue internally first. He promised to make payments by month end by selling off his car and other assets. At this point, we told the customers that the payments made to him are treated as our loss.
Would you consider the stolen money as an asset or expense under his name?
Now that you have explained a little more, your options appear more limited. If there is reasonable hope of recovering the money during the current financial reporting period, the stolen money could still be considered an asset. But recovery from a fired employee who must sell his car to make good does not sound very likely. So you are very close to, if not beyond, the point where you must consider this an expense, much as you would if inventory was stolen. In my opinion, this additional information reinforces the need to:
Report the theft to authorities. You’ve taken employment action with no guarantee the fired individual will not initiate legal action against your company. You don’t want to be in a situation of his word against yours. Document the case for your action.
Completely separate your customers from this situation. You already have a customer relationship nightmare if they were threatened. Don’t complicate that by confusing their accounts or statements. Your action in reporting the theft to authorities may also help in explaining the situation to customers.
Thoroughly document what you are doing for audit reasons.
Determine whether you have any business insurance that will reimburse you for this loss. Some does, some does not. Of course, you must consider the impact of any claim on future insurance premiums.
Improve procedures for receiving customer payments so such a situation cannot happen again. Possibilities include electronic fund transfers, cheques by mail only to a company address, and so on.
As an aside - since when has a Chart of Account been able to be marked as inactive, and where do you do that ?
The initial response used the “same” (journal) transfer process but to a Customer account instead of a Asset account for that very reason, that it can be marked as inactive.
My mistake. You can’t (as I’ve warned people so many times before). That makes your customer solution about the only way to avoid permanent clutter in the chart of accounts, since there typically is not a Miscellaneous assets account. I guess I was focused on not treating the thief as a customer. But given @success127’s additional information, the point might be moot. It sounds like a Bad debts or Pilferage expense account may be the best choice anyway.
That makes your customer solution about the only way to avoid permanent clutter in the chart of accounts, since there typically is not a Miscellaneous assets account. I guess I was focused on not treating the thief as a customer. But given