1. Accounting for fines and compensation payments.
According to Circular 200/2014/TT-BTC, for compensation and penalties received, accountants need to consider the nature of each specific case to record them appropriately. They may be recorded as a reduction in asset value or as other income.
+ Reflects revenue from fines.
– In cases where fines are recorded as a reduction in asset value, the accountant records it as follows:
Debit related accounts
There are accounts 151, 153, 154, 156, 241, 211…
– If the fines are recognized as other income, the accountant records the following entry:
Debit the relevant accounts.
Cr 711 - Other income.
+ Reflect amounts compensated by third parties (such as insurance payouts, business relocation compensation, etc.), record:
Dr 111, 112, ...
Cr 711 - Other income.
– Expenses related to handling damages for insured cases, recorded as follows:
Dr 811 - Other expenses
Dr 133 - Deductible VAT (if any).
Cr 111, 112, 152, ...
2. Do fines and compensation payments require the issuance of invoices?
According to Clause 1, Article 5 of Circular No. 219/2013/TT-BTC guiding cases where value-added tax (VAT) does not need to be declared or paid:
"Organizations and individuals receiving monetary compensation (including compensation for land and assets on land when land is reclaimed according to decisions of competent State agencies), bonuses, subsidies, payments for the transfer of emission rights, and other financial income."
Businesses receiving compensation, bonuses, subsidies, emission rights transfer fees, and other financial income must prepare receipt documents in accordance with regulations. For businesses making payments, payment documents must be prepared based on the purpose of the payment.
In cases of compensation in the form of goods or services, the compensating entity must issue an invoice and declare, calculate, and pay VAT as if it were a sale of goods or services; the entity receiving compensation shall declare and deduct VAT according to regulations…”.
Therefore, for monetary compensation, neither the compensating party nor the recipient of the compensation is required to issue an invoice; they only need to prepare payment and receipt documents as prescribed. However, for compensation in the form of goods or services, the compensating party must issue an invoice; the recipient of the compensation can declare and deduct taxes as usual.
3. How to account for penalties and tax arrears collected after a tax audit?
Some examples of fines and compensation include: collecting fines due to customer breach of contract; collecting compensation from third parties to offset property damage (for example, insurance payouts, compensation for business relocation, and similar amounts)...
Accounting principles for penalties
When there is a high probability of collecting penalties for breach of contract, accountants must consider the nature of the penalty and account for it appropriately on a case-by-case basis according to the following principles:
– For the seller:
All penalties for breach of contract collected from the buyer that are outside the contract value are recorded as other income (Account 711).
– For the buyer:
+ Penalties are essentially discounts on purchases, reducing the payment to the seller and are accounted for as a reduction in the asset's value or the payment (not as other income) unless the related asset has been liquidated or sold.
For example:
When a contractor falls behind schedule, the investor is entitled to penalize the contractor and recover a portion of the payment already made. The recovered amount is recorded as a reduction in the value of the construction asset. However, if the penalty is recovered after the asset has been liquidated or sold, the penalty is recorded as other income.
Other fines are recognized as other income in the period in which they are incurred.
For example:
The buyer has the right to refuse delivery and to penalize the seller if the delivery is not made within the timeframe stipulated in the contract. The penalty amount is recorded as other income only when it is certain to be collected. If the buyer still accepts the goods and the penalty is deducted from the amount payable, the value of the purchased goods is recorded at the actual amount paid, and the penalty is not recorded as other income.
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