How to Account for Franchise Fees

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Franchisees must use special accounting concepts.
Franchisees must use special accounting concepts. (Image: business accounts image by Nicemonkey from Fotolia.com)

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. As the franchisee uses the services of the franchisor, the franchisee recognizes the expense over the life of the contract, not to exceed 40 years.

Record the initial franchise fees by debiting "Franchise" and crediting "Cash." This has the franchisee paying initial franchise fees. If the franchisee pays the initial franchise fees over an extended period of time, the business would use the present value of initial franchise fees.

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.

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