A person is usually familiar with the term "gambling", but they may not be aware that there are specific rules for accounting for it. Gambling involves both winnings and losses, with all or some of the amounts gained being withdrawn. This usually means cash, but can also include things like tokens, chips or coupons. In general, gambling is defined as "the activity of risking money or something else of value (called betting) on an event with an uncertain outcome with the primary intention of winning additional money and/or goods".
Winnings as income in accounting
The difference between how winnings versus losses are accounted for is very important. First, let's look at how winnings are accounted for. The amount of winnings is counted as income at the time it is received, just like any other sale. Since a person can collect their winnings, they must be recorded in the books of the business using the cash basis of accounting. This means that winnings are not recognised until they are realized and can be withdrawn. This is similar to the way a person keeps the books of his/her business, where the cash basis of accounting is used, unless otherwise stated.
Although the winnings are treated as income at the time they are received, any expenses associated with those winnings should be treated as expenses at the time the winnings are realized. For example, if a person wins a large jackpot, he is likely to go straight to the casino cashier's office. The amount of money paid out should be accounted for as an expense because it was used for gambling and only then realized as a winnings. The good news is that any winning tickets can be redeemed at the cash desk, so there is no need to recognise the value of the winning tickets as an asset in the books of the business.
Accounting for casino losses
Gambling losses are a different matter from winnings. A loss determines whether there is a profit or whether income has actually been earned in that period of time. Losses from gambling are accounted for in different ways, depending on the concept used by the enterprise applying it, but generally, under the cash method of accounting, the amount lost is not accounted for until it is realized.
However, if the casino prefers to use the accrual method, the loss is accounted for when it occurs and before it is realized. This may occur in a casino where a person wins part of his money and then loses it completely. In this case, the part of the winnings that has not yet been realized is accounted for as a loss. The same applies to losses in a partial realization situation.
In general, the recognition of revenue from gambling activities must comply with the following rules:
- Revenues should be accrued when they are received, if the enterprise uses the cash basis of accounting.
- Losses should be accrued after they occur and before they are realized, if the company uses the accrual basis of accounting.
Deductions, prizes and jackpots
Gambling should not be deductible as a business expense, which means that losses cannot be offset against other types of income or recorded as an expense in the books. On the other hand, prizes and jackpots received from gambling can be treated as discounts and should be recorded as revenue at fair market value (FMV). FMV is the price at which an item, good or service can be sold or exchanged in a current transaction between willing parties. Prizes and jackpots may also be recorded as cost reductions if they are awarded for specific business functions.