Definition
The term collections for third parties refers to money collected from customers on behalf of another entity. The most common examples include sales and payroll taxes. When a company collects this money, the intention is to eventually transfer it to the third party. Following the receipt of this cash, the company would classify the collections as a current liability on the balance sheet.
Explanation
Current liabilities are defined as debts that must be paid within one year or one operating cycle, whichever is longer. When a company collects money from a customer or employee on behalf of a third party, this transaction becomes part of a larger group of liabilities from advance collections, which is a component of the company's definitely determinable liabilities, since it's both known to exist and can be measured precisely.
Collections for third parties include money received from customers as well as employees. For example, a company may collect state sales tax, which is eventually remitted to a state agency. A company may also collect payroll taxes, such as Social Security, or FICA, which would be transmitted to a federal agency. Companies can also collect money for third parties such as insurance carriers and medical care providers as part of a payroll deduction program.
Since the money collected will eventually be transmitted to the third party, the company would record the transaction as an increase to cash and a corresponding increase to a current liability. When the money is transmitted to a third party the balance in the current liability account decreases as well as the cash account.
Example
Company A does business in New Jersey, and is responsible for collecting a 7.0% state sales tax. This money is payable to the New Jersey Treasury Department on a quarterly basis. In the month of March, Company A collected $2,140,000 from customers. This represented $2,000,000 in revenue and $140,000 in New Jersey state sales tax. On April 1, Company A transmitted $425,000 in state sales tax collected in the first quarter of the year.
The journal entry to record the third party collection would be as follows:
Debit | Credit | |
Cash | $2,140,000 | |
Revenue | $2,000,000 | |
Sales Tax Payable | $140,000 |
While the journal entry to record the transfer of the sales tax collected to the New Jersey Treasury Department would be as follows:
Debit | Credit | |
Sales Tax Payable | $425,000 | |
Cash | $425,000 |
Related Terms
The financial accounting term current liabilities are generally defined as any debts that must be paid within one year or one operating cycle, whichever is longer. Current liabilities are a subcategory of liabilities, which appear on a company's balance sheet.
Moneyzine EditorJanuary 12th, 2024
The financial accounting term determinable current liabilities refers to near-term debt obligations that can be precisely measured. To qualify as a determinable current liability, the debt obligation is reasonably expected to come due in a single operating cycle or one year. There must also be certainty about the existence of the obligation, as well as the amount owed.Moneyzine EditorJanuary 16th, 2024
The term liabilities from advance collections refers to money collected from others that is returnable or redeemable for goods or services. Liabilities from advance collections appear as a current liability on a company's balance sheet and include refundable deposits, advances received from customers, gift cards, and collections for third-parties.Moneyzine EditorJanuary 23rd, 2024
The term advances from customers refers to money collected by a company prior to providing a product or service. Advances from customers are oftentimes collected when businesses sell prepaid subscriptions or gift certificates.Moneyzine EditorJanuary 4th, 2024- The term refundable deposits refers to cash collected from credit customers that a company expects to return after a specified period of time, or when certain conditions are satisfied. When companies collect this money, the intention is to return it after a relatively brief period of time. Following the receipt of the cash, the company would classify the refundable deposit as a current liability on the balance sheet.Moneyzine EditorSeptember 21st, 2023
The term accrued liabilities refers to unpaid expenses resulting from contractual agreements with another party. Accrued liabilities appear as a current liability on a company's balance sheet, and include items such as income taxes, the company's share of payroll taxes, property taxes, and compensated absences.Moneyzine EditorJanuary 3rd, 2024
