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Prepaid Revenue
The document discusses the concept of prepaid revenue, specifically how it is recorded and classified in accounting. It explains that cash received for services not yet delivered, such as airline tickets or magazine subscriptions, should not be recognized as revenue until the service has been provided. Prepaid revenue is initially recorded as a current liability and is then moved to a revenue account when the service is fulfilled.
Prepaid Revenue
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- 2. Prepaid RevenueDeterminingrevenue earned for a periodProfit = revenue earned in a particular period less expenses incurred in that period of tiem
- 3. Prepaid RevenueWhen aTrial Balance is Prepared , accounts reflect the cash transactions that have taken place within the reporting period.
- 4. Hey! I amoff to Africa!
- 5. Buy air tickets!Whenwould I buy the plane tickets from Australia to Sth Africa?I need to attend our son’s wedding on July 15th, 2012
- 6. Buying plane ticketsWellin advance for my planned future tripCash is paid up frontAirline has accepted the money for a future booking (We used Qantas!)Cash is paid up front with the promise of something in the future.
- 7. Therefore.....Qantas (airline) couldhave $1000’s of cash that has not yet been earnedShould this be treated as revenueNO!The business has not yet fulfilled its obligations!Therefore the business has not yet earned its revenue.
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- 9. Looking for magazinesto help with gardening.
- 11. Why buy inadvance?What are my options if I like Better Homes and Gardens and want it delivered to my home?
- 12. What if?I buythe two year subscription on July 1st 2010At that point both subscriptions are prepaid, as I do not have any magazines yet.Therefore we open up a Prepaid Magazines Subscription Revenue Ledger Account in the books of Better Homes and Gardens and put the total of ?(how much) in there?
- 13. How do weclassify prepaid revenue?When the payment for the magazine subscription is paid, have I received any magazines?When will I receive my first magazine?
- 14. A personal experience!Sixyears ago I paid $60 for a three year subscription to a gardening magazine. After 18 months of receiving the magazine, I got a letter to say they had stopped publishing the magazine.
- 15. For how manymore months should I really have received the magazine?Will they, should they, refund the unused subscription amount?Questions!
- 16. Happyending!The magazine companydid refund the unused amount.Therefore............ How is prepaid revenue classified?
- 17. Prepaid Revenue= currentliability At time when prepaid revenue is made, it is all placed in a Prepaid Revenue Ledger Account.
- 18. Prepaid Magazine Subscriptions1stJuly 2010
- 19. Liability becomes arevenue when....The commitment is fulfilled, the liability will be eliminated The revenue is recognized as being earnedIt then comes out of the Prepaid Revenue account into the Revenue Account.Nb On Balance Day, the revenue that has been consumed is pulled out of prepaid revenue ledger and placed in the appropriate revenue account.
- 20. Let’s assumeBetter Homesand Gardens has $20,000 prepaid magazine subscriptions. How would it look in the ledger accounts?
- 21. Prepaid Magazine SubscriptionsCashat Bank$20,00001st July 2010Magazine SubscriptionsNbOn Balance Day, the revenue that has been consumed is pulled out of prepaid revenue ledger and placed in the appropriate revenue account.
- 22. Can you workout the general journal entries?
- 23. Prepaid magazine subscriptionrevenue2000020000Magazine revenueAdjusting entry for magazine subs earnedPrepaid magazine revenue20000P and L summary20000Closing entry
- 24. Prepaid Magazine Subscriptions1stJuly 201030th June 2011Cash at BankMagazine Subs Revenue$20,0000$20,0000Magazine Subscriptions30th June 2011$20,0000Prepaid Magazine Subs$20,000030th June 2011P and L SummaryNb On Balance Day, the ledger accounts would look like the above.