A franchise is a type of license that grants a franchisee access to a franchisor’s proprietary business knowledge, processes and trademarks, thus allowing the franchisee to sell a product or service under the franchisor’s business name.

Is a franchise fee an asset?

The franchise fee covers your initial training, supplies and gives you access to the unique goods or services associated with the franchise. The franchise fee is recorded at its full present value amount. On the balance sheet, the franchise fee is listed under the assets section as an intangible asset.

Why is a franchise fee an asset?

Accounting for an Initial Franchise Fee When a franchisee pays a franchise fee to a franchisor, this payment can be considered an intangible asset. It is permissible for the franchisee to recognize this cost as an asset, since it is an asset acquired from a third party.

How to account for franchise fees in accounting?

Accounting and Franchises. Franchises have special accounting concepts. The main concept a franchise must worry about is accounting for franchise fees. Franchise fees are fees a franchisee pays a franchisor for the rights to use the franchise name and other services from the franchisor. The franchisee will report the amount as an intangible asset.

Which is the most common type of franchise?

The business format franchise is the most common type of franchise system adopted in the UK. This system is what most people would describe as a ‘typical’ franchise. In return for a fee, franchisees are granted the rights to use the brand name, trademarks and operate in line with a set business plan.

How does debit franchise fee amortization work?

Divide the balance you used in the “Franchise” account by the length of the franchise contract. This is the yearly amortization of the franchise fees. Debit “Franchise Fee Amortization” and credit “Franchise.” This recognizes the franchise fee as an expense.

Where does the franchisor record the continuing franchise fee?

The franchisor records these incoming payments in a development fund liability account, which the construction billings are then charged against. After that, there’s the accounting for the continuing franchise fee, which is based on a percentage of the franchisee’s sales.