Prepaid services and accounting? How do you enter it?

Hi there all!
We have a bit of a quandry. We are billing our clients for services we haven't yet performed. Prepaid bulk hour services. To me this is
like a loan from the client UNTIL we actually perform the service at which point we would enter the hours worked as income and deduct the hrs worked, from the total hrs prepaid.
Example: 50 bulk hours - $5000 - Jan 1st, 2008
Work done - Jan 15th - 2 hrs
I imagine that the $5000 we collected, goes onto our liability sheet as a loan. Lets call it Client Loans. Do we enter this as an asset like a bank loan then? And counter the liability side with an entry called Prepaid Hrs? Like this -
Assets:
Client Loans - $5000
Liabilities
Prepaid Services - $5000
How do we generate an invoice to show income? Do we debit the Client Loans and Prepaid Services at the same time?
We're a little bit over our heads here.
Thanks in advance...
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So far - so good.

Nope. At least I wouldn't call it a "loan" at all. Call it what it is - so that other users of the financial statements can tell what you are doing.
I'd call it "Unearned Client Revenue". It is a liability, most likely a current liability unless you have someone who is paying you for more than 12 months of services.

And counter the liability side with an entry

Well, think about this. Where did you put the money? Unless you created a separate bank account to hold those funds till you earn them, it's in your bank account. That is the debit entry.

The initial entry - in a manual format - would be to debit the bank account you deposited the customer payment to, and to credit the Unearned Customer Revenue account.
When you actually perform the services, credit your revenue account and debit the unearned customer revenue account.
In an automated accounting system, like QuickBooks, etc, you can direct the transaction to post in those accounts.
Who is it that you go to for tax and accounting help at year end? That person should be someone you consult on a regular basis.
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Paul A. Thomas, CPA
Watkinsville, Georgia
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wrote:

As a followup to this, when is prepaid service revenue recognized? Under cash accounting, revenue is recognized when cash comes in. Under accrual, does one recognize all the income at the point the money is received or does the revenue get recognized as the work is actually performed? If the income is all recognized when the cash is recieved, what is being recognized? I'm trying to figure out what the income statements would look like, say for example, a person who enters an annual contract once a year. This person gets a check for 60K on Jan 2nd but has monthly expenses related to the service performed. Do they show one month with a huge net income and then 11 months of negative cash flow?
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In accrual accounting, income is recognized as goods or services are provided.

The receipt of the cash.

That's about it. Take a Christmas tree farmer. He's what, making sales for 6 weeks a year. The remaining ten and a half months he's spending money.
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Paul A. Thomas, CPA
Athens, Georgia
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