A question that I find coming up quite often from salon and spa 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. 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.
Before we start lets define Income as this is what goes onto your Income Statement and forms part of your taxable earnings.
Income can be defined as money or money equivalent that is either earned or accrued during an accounting period. Income generally derives from sales of goods or services that normally increase the owner’s equity in an enterprise. An example of goods would be retail items like moisturisers, cleansers and examples of services would be massages or facials.
As we have used the supply of goods and services in exchange for money (or money equivalent) as the criteria to define what generally constitutes income let’s take a look at some transactions that often cause confusion as they fall neither into the category of goods nor services.
Although a client may pay cash when they buy a voucher this does not mean that it is income. 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 the purchase a product or a service thus constitutes the supply of goods or services and therefore will appear on your income statement as income.
Because Vouchers sold are reflected on your Balance Sheet and Goods 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 (comprised of a client pre-paying for a number of sessions, ie 10 Massages) are 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 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 goods 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.
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 goods 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.
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.