What happens when you see a charge to a movie theater on the organization’s credit card and you realize this is probably not a valid expense? You talk to the staff member who made the charge and she exclaims, “Oh no, the organization credit card and my personal card are both blue and I pulled out the wrong one. I’m so sorry! I’ll reimburse the organization right away.” How would you record the theater purchase?

In cases like this one, you come to the realization that not every purchase is an expense. The theater purchase is an advance, albeit an inadvertent one, to an employee. It represents money that needs to be repaid to the organization.  As such, the transaction should be coded, not as an expense, but as an asset.

Are You Using the Wrong Accounting Framework?

You may wish to review our earlier post, Are You Using the Wrong Accounting Framework?  Here we talk about the perils of using “checkbook accounting” as the frame of reference for your nonprofit organization’s accounting. You must consider all three “buckets,” (Assets, Liabilities and Net Assets) before determining which bucket to use for a particular transaction. Each bucket contains part of the organization’s chart of accounts. Once you know the right bucket, you then must pick the best account within that bucket.

In this example, the staff member’s mistaken charge best fits the Assets bucket. That’s because the money will be repaid to the organization, which makes it a receivable type of asset.

Tip: If you have trouble figuring out the right bucket, try the process of elimination. The erroneous charge is not an expense of the organization, nor is it income, hence it does not belong in the Net Assets Bucket. It does not impact anything the organization owes to anybody so it does not belong in the Liabilities bucket. The only bucket left is the Assets bucket.

Are Fraudulent Charges an Asset?

As another example, what if you are posting downloaded bank transactions and you find some transactions that look suspicious? Upon further investigation you determine the transactions are, in fact, fraudulent. How do you record them? They certainly affected cash, but they are obviously not an expense of the organization. In fact the bank has agreed to reimburse the organization. There is your clue – the organization will be receiving money to offset these expenditures. While on the surface it may not look this way, the fraudulent charges should be recorded in the Asset bucket because they represent a receivable from the bank.

A Useful Account: Miscellaneous Receivables

In both examples above, once you figure out that you are dealing with the Assets bucket, you then need to select a specific asset account from the chart of accounts to use for posting the transaction. That account would be Miscellaneous Receivables.

In previous posts we talked about receivables from clients or customers of the organization and receivables from grants and pledges. It’s also common to run into transactions such as the above two examples that represent miscellaneous receivables. However, miscellaneous receivables arise and are handled completely differently than receivables from customers or donors.

Not an Accounts Receivable Account

Here’s an important point:  The Miscellaneous Receivables account is NOT an accounts receivable type of account. We repeat, it is NOT an accounts receivable type of account. Set up your Miscellaneous Receivables account as an “other current asset” type of account. This means you do not have to associate a customer name with the transaction, though it’s a good idea to at least make a note in the memo area regarding who owes the money. Also it means you do not use a sales receipt or invoice to create the receivable. You simply code the expenditure to this account or set up the receivable using a journal entry.

Easy Transaction Posting

In the theater purchase example, the bookkeeper can post the credit card charge to the Miscellaneous Receivables account without missing a beat. She does not need to create an invoice for the receivable. Then she can notify the employee of the reimbursement owed and deposit the reimbursement back to this account once it’s received. The deposit will zero out the balance in the account.

The bookkeeper can also post the fraudulent bank charges to Miscellaneous Receivables. When the reimbursement from the bank is received, the deposit can be posted to this same account to zero out the balance in the account.

It’s a good idea to keep an eye on the Miscellaneous Receivables account each month to make sure it’s maintained and does not become a dumping ground for all kinds of oddball expenditures. Of course this advice pertains to all balance sheet accounts!

Miscellaneous Receivables is a handy account to hold all those oddball expenditures that will be reimbursed and also to use for recording the reimbursement. Again, do not use a sales receipt or invoice payment to record the reimbursement. As with the initial transaction that set up the amount to be received, simply post the reimbursement directly into the Miscellaneous Receivables account.

Oddball expenditure problem solved!