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A story of death and taxes

by , 02 August 2013
I came across a discussion on a LinkedIn group that I want to share with you. The member wrote in about his client Jacob's business. Jacob runs a funeral home. He has just landed a contract with an insurance broker who provides funeral cover.

Basically, how it works is that a person, who is planning for his funeral, pays the insurance company to hold money to pay for the funeral. Jacob's company then gets the business from the insurance company to carry out the funeral when the client dies.

Let's have a look at the question about how to report insurance correctly on the ledger, and then the top two responses from members of the bookkeeping club who responded.

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What's on the other side of the ledger?

The insurance company sends Jacob monthly statements that show how much each funeral is worth. The bookkeeper thinks that he should record this as an asset in his ledger.

He has two questions related to this recording:

1) Is 'sales' the other side of the ledger?

2) Even if he categorise it as sales, would Jacob have to report it as taxable after the funeral? Or before?
These questions received a lot of attention, and I've picked out the best two responses for you. Keep reading to see what they were…

What did the two bookkeeping experts suggest?

Response 1: Jacob's funeral home's basically holding the money in escrow, until the date of death. This is an asset. It is a sale when they draw the money.

Response 2: I'm assuming the "monthly statement" is for the funeral home's information and no cash is paid.  (It would seem logical that the insurance company would hoard the money until required to pay it out before the funeral).

If this is correct, then NO entry is required (or warranted). The revenue recognition would occur when the funeral home performs services and bills the insurance company.

Do you have a better answer? Send it to me : philip@fsp.co.za and I may publish it in our upcoming newsletters.

Until next time,

Philip Rosenberg

Managing editor, Practical Accountancy Loose Leaf

P.S. If you have a question, get it answered on the Accounting and Tax Club. A question's answered every nine minutes on the site.

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