Operated Cash Calls Discussion
This post describes how to properly make operated cash call entries from the operator’s point of view. It includes standard procedures, and more importantly, how to handle cash calls when circumstances require non-standard adjustments.
Operated Cash Call Accounting Entries
Projects with multiple partners have budgets defined in an “authorization for expenditure,” or AFE. Once the AFE is approved by all partners, it becomes the authorization for the project to incur costs on behalf of all partners. Operators issue operated cash calls to invoice non-operating partners for their share of expenses the project is expected to incur on their behalf.
Cash calls are usually generated when the project is ready to start incurring costs. In an ideal situation, all partners will pay the cash call invoice in a timely manner, making the project fully funded.
Cash calls are, in effect, prepayments made by partners for expenses that will be incurred by the project (AFE). The operator maintains these prepayments in their cash call payable account. Partners maintain these prepayments in their prepaid cash calls account.
Making a Standard Operated Cash Call
Operated cash calls are generated by the operator for each partner. The cash call amount is equal to the partner’s percentage of the AFE budget.
The cash call payable account (6310 in this example) must have the AFE and partner/vendor as mandatory. This liability will be drawn down as the project progresses and costs are incurred and invoiced, either through a joint venture bill or standard invoice.
The cash call receivable account (1425 in this example) must have the partner/vendor and invoice number/date as mandatory. This account is then treated like any other receivable account. For this example, we’ll have a cash call of $100.
Cash Call Entries
| 1. Credit cash call payable | CR 6310 – Vendor Invoice: AFE: $100 |
| 2. Debit cash call receivable | DR 1425 – Vendor Invoice: $100 |
Payment Received for Amount Invoiced
When the partner pays the cash call, the cash call receivable is cleared and the bank account (1010) debited.
Cash Call Entries
| 1. Credit cash call receivable | CR 1425 – Vendor Invoice: $100 |
| 2. Debit bank account | DR 1010 – $100 |
Partner Pays More Than Invoiced Amount
When the partner pays more than the amount invoiced for the cash call, the partner is cash-called for the amount overpaid. The cash receipt entries do not change. In this case, the partner overpaid by $100.
Cash Call Entries
| 1. Credit cash call payable – overpayment amount | CR 6310 – Vendor Invoice: AFE- $100 |
| 2. Debit cash call receivable – overpayment amount | DR 1425 – Vendor Invoice: $100 |
Cash Receipt Entries
| 1. Credit cash call receivable – full amount paid | CR 1425 – Vendor Invoice: $200 |
| 2. Debit bank account – full amount paid | DR 1010 – $200 |
Partner Pays Less Than Invoiced Amount
When the partner pays less than the amount invoiced for the cash call, a reversal is made for the amount of the underpayment. The cash receipt entries do not change. In this case, the partner underpaid by $25.
Cash Call Entries
| 1. Debit cash call payable – underpayment amount | DR 6310 – Vendor Invoice: AFE-$25 |
| 2. Credit cash call receivable – underpayment amount | CR 1425 – Vendor Invoice: $25 |
Cash Receipt Entries
| 1. Credit cash call receivable – full amount paid | CR 1425 – Vendor Invoice: $75 |
| 2. Debit bank account – full amount paid | DR 1010 – $75 |
Refund Cash Call
Once the project has been completed and all expenses have been accounted for, if the project is under budget, a refund may be issued to the partners. This refund is for $50.
Refund Entries
| 1. Debit cash call payable | DR 6310 – Vendor Invoice: AFE – $50 |
| 2. Credit bank account | CR 1010 – $50 |
Reverse or Close Cash Call
In the following situations, the $100 cash call may be reversed or closed:
- The project has been put on hold or canceled with no payment received.
- The partner wishes to pay their share of costs as they occur and has been cash-called with no payment received.
Refund Entries
| 1. Debit cash call payable | DR 6310 – Vendor Invoice: AFE-$100 |
| 2. Credit cash call receivable | CR 1425 – Vendor Invoice: $100 |
Cash Call Drawn Down with No Payment Received
These entries are required if the cash call will not be paid. In this case, the joint venture process has drawn down the cash call by $10. We need to move the amount drawn down from the cash call payable account to the JV receivable account (1420).
Cash Call Reversal Entries
| 1. Debit cash call payable | DR 6310 – Vendor Invoice: AFE-$100 |
| 2. Credit cash call receivable | CR 1425 – Vendor Invoice: $100 |
Move Invoice to Receivable Account Entries
| 1. Credit cash call payable – for the invoiced amount | CR 6310 – Vendor Invoice: AFE-$10 |
| 2. Debit JV receivables – for the invoiced amount | DR 1420 – Vendor Invoice: $10 |
Partner Pays Cash Call, Then Rescinds Payment
This situation is effectively the same as the one in Cash Call Drawn Down with No Payment Received. The cash call has not been paid and the cash call has been drawn down. Payment may have been made but, for example, was netted off the next payment received from the partner.
Cash Call Reversal Entries
| 1. Debit cash call payable | DR 6310 – Vendor Invoice: AFE-$100 |
| 2. Credit cash call receivable | CR 1425 – Vendor Invoice: $100 |
Move Invoice to Receivable Account Entries
| 1. Credit cash call payable – for the invoiced amount | CR 6310 – Vendor Invoice: AFE-$10 |
| 2. Debit JV receivables – for the invoiced amount | DR 1420 – Vendor Invoice: $10 |
Transfer Cash Call to a Different AFE
Partner requests balance ($5 in this case) from one AFE to be moved to another AFE. This may happen when a project has ended with funds outstanding in the cash call payable account for the partner.
These funds may be transferred to another project instead of being refunded. Here we assume that the new AFE has been cash-called; therefore, we need to apply the transfer payment to the new cash call invoice.
Cash Call Reversal Entries
| 1. Debit cash call payable – old AFE | DR 6310 – Vendor Invoice: AFE-$5 |
| 2. Credit cash call receivable – new CC invoice | CR 1425 – Vendor Invoice: $5 |
Partner Sells Interest in Project and Requests Refund
Entries are required if the sale is for the project only. No entries are required if the sale is for the entire company.
The division of interest (DOI) for the AFE will also have to change to reflect the new partner. These entries are needed if the original partner is to be refunded the remaining cash call balance ($15) and the new partner cash-called for the same amount.
Cash Call Refund Entries
| 1. Debit cash call payable – refund original owner | DR 6310 – Vendor Invoice: AFE-$15 |
| 2. Credit general payable – refund original owner | CR 6210 – Vendor Invoice: $15 |
Cash Call New Partner
| 1. Credit cash call payable | CR 6310 – Vendor Invoice: AFE-$15 |
| 2. Debit cash call receivable | DR 1425 – Vendor Invoice: $15 |
Partner Sells Interest in Project and Transfers Cash Call Balance to New Partner
Entries are required if the sale is for the project only. No entries are required if the sale is for the entire company.
The DOI for the AFE will also have to change to reflect the new partner. These entries are needed if the original partner transfers the remaining cash call balance ($15) to the new partner.
Cash Call Refund Entries
| 1. Debit cash call payable – refund original owner | DR 6310 – Vendor Invoice: AFE-$15 |
| 2. Credit cash call payable – transfer to new partner | CR 6310 – Vendor Invoice: AFE-$15 |
Operated Cash Calls Are Routine Accounting
Operated cash calls are extremely common in joint venture projects, and they sometimes pose difficulties.
But once you know the rules for the standard situations — as well as some alternative methods for handling the non-standard situations — these difficulties fade away. Operated cash calls then become routine accounting.
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