USA How to account for old customer credits

[rossini]

We have a large amount of customer credits that are sitting in a liability account (Not on the customers A/R) that are extremely old. These were created in cases where a customer ordered a project to be completed from us, they paid for it, and then they dragged it on and on and ultimately decided not to finish the project and went dark.

We aren't about to reach out to a client 2 years later and refund the money and given it was their decision to abandon the project and walk away why would we? My question is, what is the correct accounting to get this liability off the books? Can we relieve the liability and take revenue on the project and call it closed/cancelled? Or perhaps code it to Other Income below the line?

I guess I'd like to know what an auditor would say we should do. We are an early stage company and have no plans to or requirements to get audited any soon. Any advice would be appreciated.

 

[kirby]

You need to read your state's escheatment laws. That will tell you what to do. Recording that money as income is illegal.

But, as Dirty Harry said, " Do you feel lucky?"

 

[rossini]

You need to read your state's escheatment laws. That will tell you what to do. Recording that money as income is illegal.

But, as Dirty Harry said, " Do you feel lucky?"

Could you expand on that? State is California. I'm not looking to be shady. I have two years of "credits" on the books of customers that are unreachable. They will not respond and have walked away from a project they were contractually obligated to engage in and paid for. the "credit" is there for the taking so who takes it? I'm certainly not going to blindly write checks to a company that actively has no interest in engaging anymore, if they even exist for that matter at this point. Thus the confusion and the question I first posed. This can't just sit as a liability on the books forever. It needs to be accounted for somehow.

 

[kirby]

Ok but you still have to read the law. Law says try to find the owners. After you prove you cannot you have to send the money to the state. The state has a claim to hold all unclaimed property. There is a deadline to send in the money. Penalties if you fail to do so.

 

[smallbushelp]

I take it that the funds remitted by clients were treated as deposits? What does your contract say about deposits being earned or refundable if the contract is cancelled or abandoned? If you didn't have a contract or the contract is silent on the issue then I agree with Kirby, you cannot retain the money as income. But if your contract says that you consider the deposit non-refundable, then your adjusting entry would be to debit the liability and credit an income account called "earned deposits" or maybe "forfeit deposits." I wouldn't put it below the line.

I live in CA and there is a rule regarding abandoned funds. I don't think you have to prove that you couldn't refund the money but you do have to remit it to the state. Something like a five year time frame.