A question that I find coming up quite often from salon owners and one which there seems to be much confusion over is what their business takings are at the end of the day or month and the information that must be given over to their accountant. A common viewpoint is that the money you bank is the income that you have earned. However, this is not necessarily true. In fact sometimes just the opposite is true.
Cash is not always Income
Before we start lets define Income as this is what goes onto your Income Statement and forms part of your taxable earnings.
Income generally derives from the sales of products or services. Example of products would be retail items like shampoos, conditioners and examples of services would be cuts or colours.
Some sales of products and services may be paid for in Cash, whereas others may be paid for on Account or using Vouchers, Loyalty Points or even given away for free.
Therefore when you provide the client with a product or service and generate an invoice for this service you are generating income, whether or not the client actually pays for it at that particular point in time.
Now that we have a very simple definition of what Income is let’s take a look at some other types of transactions that cause confusion when it comes to determining your Income.
Although a client may pay cash when they buy a voucher this does not mean that it is income. Remember, at the time that you exchange the voucher for money you are not yet providing products or services, rather you are providing a promise that in the future you will provide them with products or services.
You actually owe the client something in return to the value of the voucher they have purchased. This debt that you owe is a liability that sits on your balance sheet until the voucher is redeemed. At the end of any given month you would carry forward a balance of unredeemed vouchers and this value is what you owe to your clients at that point in time.
Therefore vouchers sold during a given period are not reflected as income on your Income Statement even though you have banked the money received for vouchers sold.
However, when a voucher is used to purchase a product or a service this constitutes the supply of products or services and therefore will appear on your income statement as income.
Because vouchers sold are reflected on your Balance Sheet and Products and Services purchased with the vouchers are reflected on the Income Statement there is no duplication of income.
An important point to note with vouchers is that if they expire then the process of “writing off” the voucher is not a simple matter of cancelling the voucher. You will need to write it off against another income account and it will then become taxable as it moves from a liability on your balance sheet to a form of income on your income statement.
Courses (Pre-Paid Services)
Courses (comprised of a client pre-paying for a number of services, ie 10 Cuts) can be dealt with in a very similar way.
Essentially the client is giving you their cash in advance and you are giving them a promise that you will provide them with services to the value of the money that they have given you.
The value of outstanding courses, just like vouchers, is carried forward on your balance sheet as a value that you owe your clients.
Courses sold during a given period are therefore not reflected as income on your income statement.
However, when a session is redeemed from a course it constitutes the supply of a service and therefore will appear as income on your income statement.
Because courses sold are reflected on your balance sheet and sessions redeemed are reflected on your income statement there will not be a duplication of Income.
Sales on Account
Sales on account are what I meant in my introduction when I said “the opposite is true”. If you supply products and services on account, i.e. your clients don’t pay for them at the time they receive them this still constitutes income and you are therefore liable to pay tax on these.
The amount owed to you by your clients is posted to your Balance Sheet as Accounts Receivable and is actually an Asset.
When a client who owes you money settles their account this does not constitute Income but rather it is allocated against your Accounts Receivable account. The reason it is not Income is because when the original sale took place and you provided the client with a product or service the invoice you generated then was assigned to Income and if you assign it to income again then you will duplicate your Income.
When it comes to your day end cash up the money that you have in your cash draw may not have all originated from sales. For example, there may be staff repayments of loans, there may be money from clients who settled their accounts and there may also be money that you have taken out of the cash draw for petty cash expenses like milk, coffee and sugar.
For example, if you received R1000 from actual sales for the day but then take R200 out to use for petty cash expenses then you only have R800 to bank for the day. This R800 is not your income, it is your income less your expenses and these need to be itemised on your income statement.
If you are VAT registered and record cash sales of R1000 for the day for the supply of products and services it does not mean that your income was R1000. Rather your income was (100/114) x R1000, which means that your income to appear on the income statement was actually R877.19 and the rest is VAT that you owe the revenue services.
What to give your accountant?
The information that you provide your accountant should be itemised so that the payments (debits) all match up with how you generated your income (credits).
The reason that clients give you money, for example Sales of Services and Products, Vouchers Issued, Courses Issued, VAT charged to clients and clients settling their accounts.
To match this you will have the payment types that clients have used for all of the above, ie Cash, Credit Card, Cheque, Account, Vouchers Redeemed, Courses Redeemed, Loyalty Points and Complimentaries.
Note that Staff Purchases and Client Returns fall under the sale of products and services where client returns are simply offset as a negative amount.
When passing on information to your accountant it is not sufficient to simply provide them with a print out of your cash up or your bank deposit slips.
You will need to give them a summary breakdown of the different types of transactions you have concluded so that they can draw up a proper set of books for you.
Please ensure that you consult with your accountant on these matters before making any changes as this article is purely meant to describe the nature of the transactions taking place in order to avoid duplication of revenue as well as any other confusion that may arise.