Franchise bookkeeping Question
Hi, Bookkeeping Professionals,
I recently got a client who is a brand new franchisee of a company. I've never had a client who bought a franchise. Do you have any idea how to record the assets transferred from the franchisor, financing for the purchase price? Is it the same bookkeeping as any other company? Please advise. Thank you in advance!
For day-to-day operations, the franchisor is probably able to supply the franchisee will an already-designed chart of accounts.
For your specific question: There will be new accounts needed for your chart of accounts:
- BALANCE SHEET ACCOUNTS: The cost of the franchise is entered on the balance sheet as (usually) XXX Franchise, an Other Asset account -- and stays on the books at that value, but with a sub-account (contra Account) entitled Franchise Amortization. Franchise Amortization is Franchise Cost divided by the total periods in the life of the franchise.
- INCOME STATEMENT ACCOUNTS: There will be entries on the profit and loss sheet to accounts for fees and other periodic expenses paid to the franchisor. For bookkeeping purposes, these frees are in an expenses account called Franchise Fees and possibly will have sub-accounts also. What those fees are will depend upon the terms of the franchise agreement
It is important to remember that what the client paid or will pay to acquire the franchise is different from what the client will pay to the franchisor out of earnings and profits. The former entries are Balance Sheet entries and are not company expenses; the latter are Profit and Loss entries.
Advice: See if your client can get you a chart of accounts from the franchisor. At a minimum, determine what fees are to be remitted periodically to the franchisor.
Thank you so much for your advice. The client gave me a list of "partial" chart of the account which came from the franchisor. It showed the COGS and income accounts only. I couldn't get the entire P&L and B&S accounts.
I asked the amortization schedule (if there is) though.
Again, thank you, Lorin!