19 September 2014
Actually company has three years contract with the client but this is nt specifically mentioned in the agreement that the fixed amount that client will be paying is towards the cost of mobile phone purchased rather client will be paying only when employee of the company report to client through mobile phone. and the company is considering this amount as reimbursement of mobile cost. is this right??
24 July 2024
The treatment of mobile phones in your scenario depends on several factors related to accounting principles and the specific terms of the contract with the client. Here's a detailed explanation:
1. **Depreciation on Mobile Phones:** - Whether depreciation should be charged on the mobile phones depends on their classification as fixed assets or not. - **Fixed Asset Classification:** If the mobile phones are considered fixed assets because they are purchased for long-term use (even if for a specific client contract), depreciation should typically be charged on them. Fixed assets are subject to depreciation to allocate their cost over their useful life, reflecting the wear and tear and obsolescence. - **Reimbursement Nature:** If the client reimburses the company for the cost of the mobile phones, this reimbursement would generally be treated as revenue or income rather than offsetting the cost of the assets themselves.
2. **Contractual Agreement and Classification:** - The fact that the client pays a fixed amount does not automatically classify the mobile phones as reimbursement for their cost. Instead, this fixed amount should be recognized as revenue or income earned from providing services to the client. - **Service Provision:** If the mobile phones are solely purchased and used for providing services under the contract with the client, they may not be classified as fixed assets in the traditional sense. Instead, they could be considered as part of the cost of delivering services, and the client's payment would be revenue related to those services. - **Accounting Treatment:** The cost of the mobile phones could be capitalized initially (if considered necessary for service delivery), but the client's payment would typically be recognized as revenue. Any subsequent costs (like repairs or replacements) might be expensed as incurred.
3. **Agreement Specifics:** - Even if the contract does not explicitly state that the client's payment covers the mobile phones' cost, the substance of the transaction (receiving a fixed amount for services provided via mobile phones) is crucial. - **Accounting Policy:** Your company's accounting policy should clarify how to treat such reimbursements and ensure consistency in recognizing revenue and costs associated with client contracts.
4. **Consultation and Disclosure:** - It's advisable to consult with an accountant or financial advisor to ensure compliance with accounting standards and proper treatment of mobile phones and client reimbursements. - Proper disclosure in financial statements is important to transparently reflect the nature of client reimbursements and their impact on financial performance.
In conclusion, while the mobile phones may not be classified as traditional fixed assets if they are solely for client service provision, the reimbursement from the client should generally be treated as revenue. Depreciation would typically apply to fixed assets used in the business, but in this case, the treatment hinges on whether the mobile phones meet the criteria for capitalization as fixed assets under your company's policies and applicable accounting standards.
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