7

My dad's clients often transfer payments, which they owe to my dad, into my bank account [for technical reasons, some payment types into my account are not currently available in my dad's]. After a while, I transfer the amount so accummulated to my dad's account.

How do I keep a record of this in form of double-entry bookkeeping?

I see 3 accounts in play here:

  • Income/DadClientele/ClientName;
  • Asset/Cash/MyBankAccount;
  • Liability/Payable/Dad

But I don't see how to make them work together for an incoming amount of 500:

  • Credit of 500 under Income/DadClientele/ClientName;
  • Debit of 500 under Asset/Cash/MyBankAccount;
  • Credit of 500 under Liability/Payable/Dad

Is this correct? While it does fulfill the Equity = Asset - Liability formula, something feels wrong to me.

PS: One way could be to not see this as an Income at all, and see it as movement of money out of (=> credit) Liability/Payable/Dad/ClientName, and in to (=> debit) Asset/Cash/MyBankAccount. So:

  • Credit of 500 under Liability/Payable/Dad/ClientName;
  • Debit of 500 under Asset/Cash/MyBankAccount;
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  • 8
    Yikes. This is dicey. Why aren't they paying your dad's bank account directly? This smells of attempted tax fraud to me. Nov 30 '21 at 5:46
  • 12
    These are small amounts from retailer clients, who insist on paying through UPI. UPI is an instant bankaccount-to-bankaccount transfer system, which is enabled in my bank account, but not yet in my dad's (due to a technical reason). Until my dad gets the issue fixed, this is the system we have decided on. There is no tax evasion going on. If there was, then I wouldn't have wanted to record these amounts so transparently in the first place. Nov 30 '21 at 6:09
  • 4
    Understood - apologies for overassuming! Nov 30 '21 at 13:34
  • 1
    In case the IRS ask about it, this is the line: youtube.com/watch?v=s9wCMSSjTKk&t=27s Nov 30 '21 at 17:16
  • 11
    @PaulD.Waite: Since the OP mentioned "UPI" - en.wikipedia.org/wiki/Unified_Payments_Interface, this question is specific to India, IRS would not apply here.
    – user96551
    Nov 30 '21 at 19:46
14

The correct accounting, assuming that if 500 comes in, you're sending the whole amount to your dad would be

  • Debit Asset/Cash/MyBankAccount for 500
  • Credit Liability/Payable/Dad for 500

Then when you forward the funds to your dad

  • Credit Asset/Cash/MyBankAccount for 500
  • Debit Liability/Payable/Dad for 500

No income is earned, etc. (though depending on how often this happens and how large the amounts are, your bank may have questions for you and there may be regulatory and tax considerations: it will look like you're running a business and not reporting income, and then it may look like you're running a money transfer agency)

What if you were collecting, say, 1% of the funds? Then you would likely account for it as

  • Debit Asset/Cash/MyBankAccount for 500
  • Credit Liability/Payable/Dad for 495
  • Credit Income/CollectionFees for 5

And then when forwarding funds to your dad

  • Credit Asset/Cash/MyBankAccount for 495
  • Debit Liability/Payable/Dad for 495
3
  • This matches with what I had in mind. Yes, no income is earned. Dec 1 '21 at 4:51
  • No income is earned, etc. (though depending on how often this happens and how large the amounts are, your bank may have questions for you and there may be regulatory and tax considerations: it will look like you're running a business and not reporting income, and then it may look like you're running a money transfer agency) Its quite infrequent, and amounts involved are quite small (The currency for 500 in the example is actually INR, not USD). Nevertheless, I will run this by my accountant. Thank you. Dec 1 '21 at 4:53
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    I suggest that if you already have an accountant you should go to him/her first, and leave the StrangersOnTheInternet out of it. Dec 1 '21 at 16:09
10

If these are your personal accounts, and you consider your dad a separate financial entity - such that your owings to him are a Liability - then the cashflow isn't Income for you at all. It's touching your account temporarily before it leaves, and you derive no income from it.

On the other hand, if you're doing your dad's accounts at the same time as your own* - such that this payment is income for the accounts you're modelling - then you have no Liability to him, the latter payment will just be a transfer between two Asset/Cash accounts. (Or at least, if you really want to model a Liability from your bank account, then this is an Asset for your dad's bank account and the two sides balance still.)

*mixing your personal accounts into someone else's business accounts sounds like a terrible idea, as one of the comments points out. Even if you're doing his books for him, it is a good idea - and likely a legal requirement - to keep the two completely separate.

2
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    If these are your personal accounts, and you consider your dad a separate financial entity - such that your owings to him are a Liability - then the cashflow isn't Income for you at all. It's touching your account temporarily before it leaves, and you derive no income from it. This is exactly what this is. Thank you for putting it in better words. Dec 1 '21 at 4:55
  • I wish I could accept multiple answers. I have accepted Levi Ramsay's answer because he detailed it with examples. However, your statement It's touching your account temporarily before it leaves, and you *derive no income* from it. made things clearer to me conceptually, implying that not everything incoming is an Income. Dec 1 '21 at 4:58

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