Accounting for Car Dealerships (#351)
/Dealership Profit Centers
The biggest accounting issue for a car dealership is the need for profit centers. The chart of accounts needs to be structured so that you can track profitability for new car sales, and used car sales, and for servicing, and the parts counter. And if you have an in-house paint and body shop, then that will need a profit center too. And if there’s a quick service department for oil changes, then that’s another profit center.
The ramification for the accountant is pretty major, because you have to assign revenues and expenses correctly, so that they go to the right profit center. That’s not so easy, especially in the case of expense assignments, so the accounting procedures will need a heavy orientation towards transactions by profit center.
Contracts in Transit
The next accounting issue is contracts in transit. A dealership enters into a contract with a lender whenever a customer wants to use a loan from the lender to buy a vehicle. The entry for it is to record a receivable for the contract, since it takes a few days for the lender to forward funds to the dealership. And in addition, it has to record a dealership reserve, which is the commission that the dealership earns from the lender in exchange for directing its customer to the lender.
Extended Warranties
And as part of a sale, the salesperson might convince a customer to buy an extended warranty. In this case, the dealership records revenue in the amount of the warranty, while it also records a payable to the car manufacturer, since it’s the manufacturer that’s providing the actual warranty. The dealership is just a go-between, and pockets the difference between the price of the warranty and the fee charged by the manufacturer.
Car Insurance Commission
So, what if a customer doesn’t have car insurance? The dealership can refer the person to an insurance company, in exchange for yet another commission. So when a customer uses the referred insurer, the dealership records a commission receivable from the insurer.
Warranty Claims
And then we have warranty claims. When a customer brings in a car for repairs that are under warranty, the dealership compiles the full cost of the repair, and then bills the manufacturer for it. The manufacturer then reviews the amount of the claim, and might not pay all of it. If so, the accountant has to subtract the amount not paid from the original claim revenue.
Demonstrator Accounting
And then we have demonstrators. These are the cars you drive around when you’re evaluating whether to buy one. These cars come out of the regular dealership inventory and are recognized as fixed assets, which means that they have to be depreciated. Eventually, they’re sold off as used cars, which means that their remaining book value – after depreciation – is dropped into the used car inventory, and then they’re sold.
Used Car Accounting
Which brings us to used cars. When a used car is accepted by a dealership, it’s first examined for problems, which may result in repairs being made to it. If so, the cost of the parts and labor used in the repairs is added to the cost of the car. After that, the car might be sitting in inventory for an extended period of time. If so, the accountant may have to write down its book value to the lower of its cost or its appraised wholesale value. In this case, the cost of the vehicle is its purchase price, plus the cost of any upgrades made to it, plus the auction fee to acquire it, plus any travel expenditures incurred while acquiring it.
Labor Accounting
And then we have labor. This is a very big deal in a car dealership, since it usually employs a lot of people. At a high level, the accountant needs to charge their cost to the appropriate profit center, which is handled with the basic payroll entry. That’s the easy part.
The more difficult part is billable hours. These are initially charged to work-in-process labor, which is an asset account. If some of these hours turn out to not be billable, then they’re charged to expense in the current period. All other hours are charged to specific customer jobs. When that happens, the labor is taken out of the work-in-process inventory account and charged to the cost of sales. As you might expect, there’s a lot of accounting to be done in this area, and the work-in-process account needs to be examined all the time to make sure there aren’t any hours in there that aren’t really going to be billed to customers.
Parts Counter Accounting
And on top of everything else, there’s the parts counter. This one is actually fairly easy. The parts counter is treated as a profit center, so it gets credit for all parts sales, though the cost of the parts counter staff is also charged to it. And there will be physical inventory counts of the parts inventory – so if there are any obsolete parts or missing parts to be written off, they’re charged against the parts counter profit center.
Dealership Expenses
There are also dealership expenses. I won’t go into the standard items, but there are some expense categories that are worth discussing. The first is advertising.
That may not seem so unique, but the amount of it is, especially compared with other industries. Car dealerships can spend a lot on advertising, and it covers everything – billboards, television ads, radio ads, direct mail pieces – everything. They might also sponsor local sports teams, and also give away all sorts of things, like branded coffee cups and key fobs.
Another item is dealership vehicle expense. The dealership has to service its demonstrators and company cars, which includes labor and parts, as well as car washes and gas refills, and licensing and registration. The amount is not exceptional, but you don’t see this expense anywhere else.
Here’s another one – delivery expense. This includes all expenses incurred to prepare a vehicle for delivery to a customer. This can include filling the tank with gas, detailing labor, detailing supplies consumed, safety inspection labor, and even the cost to remove accessories that the buyer doesn’t want.
A big expense is floorplan interest expense. A dealership usually maintains a lot of vehicle inventory on the premises, and they’re usually financed with asset-backed loans that are called floorplan loans. Under these arrangements, the debt must be paid back when the underlying vehicle is sold. For the period when the vehicle has not yet been sold, the dealership has to pay floorplan interest expense to the lender. Though, if the lender also happens to be the manufacturer, it can issue a credit to offset the interest charges, which encourages the dealership to acquire more vehicles from it.
Here's one more – policy work. A dealership might decide to provide parts or service to a customer for free, to keep the customer happy. This usually happens when a customer complains about service work or the quality of the parts purchased from the dealership. The dealership has no expectation of billing the manufacturer for the costs incurred. Instead, these costs are charged to expense.
As you can see from all of these issues, accounting for a car dealership is not easy. There are many kinds of transactions, and the transaction volume can be really high, especially in regard to billable time. That’s why it takes a whole team of accountants to run a car dealership.