Ways to Record One-Year Subscriptions
Let’s assume that the cost of the one-year subscription for a monthly trade publication is $120. Let’s also assume the payment is made at the start of the subscription period, and that your company prepares monthly financial statements.
One way to enter the transaction is to debit the current asset Prepaid Subscriptions for $120 and to credit Cash for $120. At the end of each month an adjusting entry would be prepared to debit Subscriptions Expense for $10 and to credit Prepaid Subscriptions for $10. This approach would obviously match the annual cost to each of the 12 monthly periods benefiting from the subscription. However, this is not practical given the small amount involved.
Thanks to the accounting concept of materiality, accountants can ignore the matching principle when the amount is insignificant in relationship to the company’s size. Since no investor or lender would be misled if the entire $120 appeared as an expense in one month and $0 appeared in the other 11 months, the following entry would be more practical: debit Subscriptions Expense for $120 and credit Cash for $120 at the time of entering the invoice into the accounting records.
If an annual trade group membership fee is $6,000 and the amount is significant for the company, the company should record the payment as a prepaid asset and then write a monthly adjusting entry for $500.
