Journal Entries for Franchise
A franchise is a business model that can be adopted by an entrepreneur to get started in their own business. A franchisor agrees to provide a blueprint for the business, including the name, logo, product, and operations manual, in return for a fee and ongoing royalties.
The franchisee then agrees to follow the franchisor’s proven business model and operate its business according to the terms of the contract.
Franchises can be found in a variety of industries, from restaurants and retail stores to service businesses and education. Some of the most popular franchises include McDonald’s, 7-Eleven, gym franchises, and auto repair franchises.
Franchises offer entrepreneurs the chance to start their own businesses with a proven model and support from the franchisor, making them an attractive option for many people looking to start their own businesses.
A franchise is recorded on the financial statement as an intangible asset. An intangible asset is an identifiable non-monetary asset without physical substance. Examples of intangible assets include patents, copyrights, and trademarks.
A franchise can be thought of as a license to use a business model that has been proven to be successful. The value of a franchise lies in the ability to generate income using a proven business model.
Franchises are typically purchased from an existing franchisor. The cost of the franchise includes the initial fee paid to the franchisor, as well as any ongoing royalties or other payments that are required under the franchise agreement. The purchase of a franchise represents a significant investment, and it is important for potential franchisees to carefully consider all factors before making a decision.
Journal Entry for Franchise
Franchisee
The franchisee is the company that purchases the franchise from the franchisor. The company needs to pay the fee to receive the right to operate the business.
The cost that franchisees spend will be recorded as intangible assets on the balance sheet. The intangible assets will be amortized over the lifetime of the franchise.
The journal entry is debiting Intangible assets – Franchise and credit cash paid.
| Account | Debit | Credit |
|---|---|---|
| Intangible Assets – Franchise | XXX | |
| Cash | XXX |
The franchise will be recorded as intangible assets on the balance sheet. The cash is reduced as it is paid to the franchisor.
The franchise will be amortized based on the lifetime.
The journal entry is debiting amortized expense and credit accumulated amortization.
| Account | Debit | Credit |
|---|---|---|
| Amortization Expense | XXX | |
| Accumulated Amortization | XXX |
Franchisor
The franchisor will receive the cash from the franchisee in exchange to provide the franchise. It will be recorded as an unearned liability and amortized to revenue based on the lifetime.
The journal entry is debiting cash and credit Unearned Revenue.
| Account | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Unearned Revenue | XXX |
The cash received will be recorded on the balance sheet. It will increase the unearned liability on the balance sheet as well.
At the end of the year, the portion of unearned liability will be reversed to revenue on the income statement. It is amortized based on the lifetime of the franchise.
The journal entry is debiting Unearned Revenue and credit revenue.
| Account | Debit | Credit |
|---|---|---|
| Unearned Revenue | XXX | |
| Revenue | XXX |
The company has to recognize the revenue on the income statement base on the allocation of unearned revenue to revenue.
Example
Company ABC purchases the franchise cost $ 500,000 from company XYZ. The franchise will be valid for 10 years. Please prepare journal entries for franchises for both companies.
Franchisee (ABC)
The journal entry is debiting intangible assets – Franchise $ 500,000 and credit cash $ 500,000.
| Account | Debit | Credit |
|---|---|---|
| Intangible Assets – Franchise | 500,000 | |
| Cash | 500,000 |
At the end of the first year, the company will amortize the franchise to expense.
Amortization expense = $ 500,000/10years = $ 50,000 per year.
The journal entry is debiting amortization expense $ 50,000 and credit accumulated amortization $ 50,000.
| Account | Debit | Credit |
|---|---|---|
| Amortization Expense | 50,000 | |
| Accumulated Amortization | 50,000 |
Franchisor (XYZ)
The journal entry is debiting cash $ 500,000 and credit unearned revenue $ 500,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 500,000 | |
| Unearned Revenue | 500,000 |
At the end of the first year, the company will reverse the unearned revenue to revenue on the income statement.
Revenue = $ 500,000/10 years = $ 50,000 per year.
The journal entry is debiting unearned revenue $ 50,000 and credit revenue $ 50,000.
| Account | Debit | Credit |
|---|---|---|
| Unearned Revenue | 50,000 | |
| Revenue | 50,000 |