A franchise business is different from a startup in several ways. Franchises, for example, give franchisees the right to operate under the parent company’s brand, give them ongoing training and support, help them with consistent marketing and advertising efforts and so much more.
However, unlike a startup, a franchise follows different franchise accounting rules in several respects. To find out more about accounting for franchise fees, keep reading below.
Once-off initial franchise fee
The franchisor-franchisee relationship officially starts when a franchise agreement is signed and the initial franchise fee is paid by the franchisee. This fee is paid to the franchisor and includes the right to operate under the franchise’s brand and trademark, other rights, ongoing training and support, access to operating and customer relationship management systems, marketing and advertising, a client base and more.
When recording the initial franchisee fee in their books, the franchisee cannot expense this fee as a one-time transaction. Instead, they will need to capitalise this amount as Initial Franchise Fees. The longevity of these fees or the period over which they will be paid will be determined. Furthermore, this amount must be amortised over this period.
The accountant will subsequently debit Initial Franchise Fees and will enter Cash as a credit entry. Thereafter, the amortised portion of the initial franchise fee will be debited from the Franchise Amortisation Expense entry and the Initial Franchise Fees for the amount to be amortised will be credited in the books.
Ongoing franchise fees
Ongoing franchise fees include royalties that are paid by the franchisee to the franchisor for goods sold or services rendered as well as fees that are paid as part of a franchise marketing fund.
When a franchisee makes these payments to the franchisor, they are considered expenses. As a result, Franchise Fees are debited and Cash is credited whenever a payment is made to the franchisor.
The balance sheet
In short, a balance sheet is a summary of a business’ financial position at a given point in time. It provides this information by listing all the assets, liabilities and equity balances of the business. In the double-entry accounting system, which has many advantages, total assets equal total liabilities plus the equity accounts.
In a franchisor-franchisee relationship, the initial franchise fees will be recorded as a non-current asset in the balance sheet. Cash is also considered an asset. However, the initial franchisee fee, as well as ongoing franchise fees, will lead to a reduction in the franchisee’s cash balance.
The income statement
Finally, the income statement determines net income by subtracting expenses from the revenue earned. Items that are listed as expenses here include the franchise amortisation expense and franchise fees.
Following this type of accounting and finance schedule will give a franchisee a clear position of where they stand financially in their relationship with their parent company.
Choose the right tax accountants in London
Accounting for franchisors and franchisees can be a confusing and time-consuming process that requires professionals taking care of it. You can always opt for outsourced bookkeeping services in London to help your franchise business not only record transactions accurately but to also optimise your financial position.