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General Accounting Discussions: Need help ASAP - customer's paying in advance for monthly service

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    • CommentAuthorsschlott
    • CommentTimeSep 8th 2009
     
    here's my question. we have a customer that wants to pay 3 years in advance for monthly monitoring service of his GPS tracking units... the most we bill a customer at a time is annual service. If we issue him an invoice for his entire contract (the 3 years) then will that mess up any numbers,books, cash flow, reoccurring, reconciliations, year-end close out, reporting, general accounting principals,etc.? are there any finical implications other than making sure not to double bill him...? knowing that there are possible upgrades, service issues, changes to account in billable applications, etc...
    • CommentAuthorzaqperez
    • CommentTimeSep 9th 2009
     
    This shouldn't cause any problems if handled correctly. The amount received should be treated as a liability (Unearned Revenue) and as time passes revenue is recorded and the liability is reduced.

    To demonstrate:

    DR - Cash $1,800
    CR - Uneanred Revenue: John Doe $1,800
    To record prepayment of services (36 months @ $50 ea.)

    CR - Unearned Revenue: John Doe $50.00
    DR - Revenue $50
    To record services provide for Jan

    CR - Unearned Revenue: John Doe $50.00
    DR - Revenue $50
    To record services provide for Feb

    CR - Unearned Revenue: John Doe $50.00
    DR - Revenue $50
    To record services provide for Mar

    etc...

    Unique and unpredictable situtations need to be handled on a case by case basis but any additional charges or credits probably need to be made directly to the Unearned Revenue account.

    Hope this helps!
    • CommentAuthortgm603
    • CommentTimeOct 11th 2009 edited
     
    Let say the monthly service fee is $100 . so , for 3 years the total will be $3,600 ( $100 x 36 months ).

    When the customer made payment :

    DEBIT Bank Account $3,600
    CREDIT Unearned Revenue Account ( Customer A ) $3,600 ( this will be Balance Sheet item under Liability )

    For every month , Journal Entry :

    DEBIT Unearned Revenue Account $100
    CREDIT Service Rendered Account $100 ( this is your revenue and will be at the Trading , Profit & Loss Account )

    Do the Journal Entry for taking up the service fee every month until the 36th month , at the end , the Unearned Revenue Account will be zero

    Hope this help .

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