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 -
Client Loans - $5000
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...
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
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.
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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