Reader writes: Does your chart of accounts manual include accounts appropriate for mailing services such as collecting postage, paying discounted postage, etc.? That is something I haven’t really been able to wrap my brain around for our Chart of Accounts….
Tom: Yes it does, Dale. BUT it’s more complicated than just having the accounts on the Chart of Accounts. I’ve attached a paper I did on the subject which may be more than you ever want to know …. and I’m making it available for all at www.crouser.com/shop.
Now, let me give you some highlights because flowing postage purchased for customers can hose up your financial statement (mainly the income statement but also the balance sheet). Here are a couple things it can do:
+ Messes Up Sales History: if you record customer postage as a sale, your sales history may look like you are growing but it may just be your customers mailing more. Likewise a decrease in your sales may mask a real sales increase accompanied by a decrease in the amount of postage your customers purchase.
+ Messes Up Direct Materials: recording the cost of customers’ postage in direct materials will increase cost of direct materials and may lead you to believe your overall prices are too low.
This, of course, leads to widely varying results from month to month and year to year.
Why Not Have Customer write USPS a Check?
Technically, the US Postal Service (USPS) does not allow third party checks to be deposited into your permit account, which means that a check payable to “Postmaster” that is not drawn on your checking account will not be accepted. However, many bulk mail acceptance clerks accept these third party checks and lull many mailers into a false since of security.
Here’s the rub. If the check is returned for insufficient funds, then it comes back to the USPS, not to you and the USPS will immediately takes enough funds to cover the NSF check from your permit account including bank fees. That may mean your account could be short for other customer mailings so you have to pony up the missing funds quickly and/or have your other customer’s mailing delayed.
Additionally, you then do not have the NSF check to collect from the customer so you have to hope the customer reimburses you quickly. This is a remote possibility in most cases but why take the risk?
How to Handle It
You should collect the postage from the customer and then issue the USPS a check from your account. But how do you handle that in your financials?
For typical shops that do not markup postage (sell it to the customer at cost of purchase) and when the cash coming in and going out is close to the same time, then an easy and better choice is to use a clearing account on the Balance Sheet.
How does that work?
Set up an account in Current Liabilities (you are holding money for the customer so it is a liability to you even if the cash comes in and goes out at almost the same time – I suggest Customer Postage as a title). Deposit the customers’ postage check normally debit Cash (increases your balance) and credit Customer Postage (increases the liability). When you write your check to the USPS, debit Customer Postage (decrease) and credit Cash (decrease).
The balance in the Customer Postage account is usually zero so it has no net effect on your balance sheet nor does it inflate your sales or your cost of direct materials so you avoid inflating sales or the cost of your direct materials.
You could also set up your clearing accounts on the Income Statement in the Direct Materials area. Again, if cash comes in and goes out quickly, then the balance in the account will typically be zero and have no impact on the Income Statement.
In this example this transaction would be recorded each time a purchase of postage or a payment from the customer is received. A way to avoid that and to reconcile cash is to keep a subsidiary ledger showing the specific activity in this account. That would be the cash-in and cash-out which is identified by customer. You may use a simple form (described in our white paper on the subject) for this or, in some cases, you can identify the transaction in your accounting system so it can be tracked by printing out the entries of this Customer Postage account (identify cash-in by customer and cash-out by customer.
Any of these processes works well for most shops; however, there could be complications.
+ IF you charge a handling fee for this transaction, then you have to have a compound entry which would recognize the fee as a debit to cash and a credit to a sales account in addition to the entry described above.
+ IF you purchase postage for your postage meter and then dispense it for customer postage as well as use it for your general postage and, perhaps your direct mail (postage for your direct mail advertising should be recorded as an advertising expense rather than a postage expense), then you have a more complex entry that is explained in our white paper, Handling Customer Postage within Financial Statements.
+ IF you markup the postage then you must treat it as a sale and a cost of direct materials. This also is explained in our white paper, Handling Customer Postage within Financial Statements.
+ When you purchases postage for your meter by phone and then it is used for customer postage as well as for the shop’s use. Additionally, if you differentiate between postage used for normal business and postage for our direct mail efforts (sales expense) is also explained in our white paper, Handling Customer Postage within Financial Statements.
To order for $50, click on www.crouser.com/shop.
Isn’t this fun? If you have questions, please message me at email@example.com and I’ll try to answer them.