In this video, I explain accounting for franchisee.
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Franchisee Accounting:
a. Initial Franchise Fee: The franchisee records the initial franchise fee as an intangible asset, typically termed "Franchise Rights." This asset is then amortized over the life of the franchise agreement.
b. Ongoing Royalty Fees: These are recorded as expenses by the franchisee as they're incurred.
c. Advertising and Promotion Funds: Payments made to the franchisor for advertising are recorded as prepaid expenses until the advertising occurs. Then, they're expensed.
d. Purchase of Goods or Services from Franchisor: The franchisee would record these purchases as either inventory (if for resale) or as an expense.
e. Lease Arrangements: If the franchisee leases property or equipment from the franchisor (or any other party), they would account for the lease either as an operating lease or finance lease, following the relevant accounting standard (like ASC 842 for U.S. GAAP).
f. Initial Set-Up and Pre-opening Costs: These are costs the franchisee incurs to get the franchise operational. They are expensed as incurred unless they result in a recognizable asset.
Lastly, it's important for both franchisors and franchisees to regularly review the franchise agreement and any related addendums to ensure they are accounting for all items appropriately. Additionally, since this is a summary, diving into the specific accounting standards or consulting with an accounting professional would be essential to ensure correct and compliant financial reporting.1