(alt accounting wise ones - sorry for the long crossposting. Would you be so kind as to proffer a quick Usenet opinion on the discussion below? )
It isn't owed, but the income hasn't been earned yet. They haven't earned that income yet because they haven't provided any service, or coverage.
(Also - to clarify for those just tuning in - I'm not talking about tax purposes. I'm talking about bookkeeping for the sole purpose of generating a correct P&L statement.)
Yes, there is a liability factor, because you have received payment for a service you have not provided. I'll not back down here because of this I am absolutely sure.. Again, insurance books and premiums received might be handled differently, but I can absolutely guarantee you that if a tenant pays rent in advance that the unearned rental income is supposed to be deferred on the books as a liability until the rent is actually incurred.
Think - what would happen if the tenant paid their rent 5 years in advance? In your methodology, you would only see income once every five years, but you would have offsetting expenses through the entire period, which would skew the actual P&L terribly - showing a huge profit the year the monies were received, and losses in the 4 +subsequent years. What would happen to your P&L if you received 5 years of pre-paid rent in December of '04, for a lease that began in Jan '05?
A tank of gasoline is the purchase of a supply, and you're replacing the tank you just used up. You could make a case (based entirely on theory, and completely devoid of common sense) for purchasing a magazine subscription and subsequently recording it as a prepaid expense, but even I, the nickel-and-dime queen, wouldn't mess with an amount that tiny. Recording it would not have a material effect on the books. (If it did, there are bigger problems in the company. Much bigger problems.) Best just to expense it and be done with it.
However, I would hazard an educated guess that the magazine people are indeed handling their revenue on that sale in the manner I have described, by deferring the unearned income. They can't pair off income and expense properly if they do not pair off in the same accounting period. If they have not shipped magazines that people have already paid for, then that money is a liability on their books.
Not on the same books.
The insurance payment that Walter made is a pre-paid expense on Walter's books, on that we're agreed. So, why wouldn't it be unearned income on the payee's books? They actually fit quite well together, and the theory is actually exactly the same if you think about it.
That's just so wrong. According to GAAP, income is recognized when it is earned, not when it is received. Help - I need back-up!
A