Invoice for year long subscription
mtopiwalla
Member Posts: 5
Hello there,
I would like your help and guidance on how I can solve the following issue.
We have customers who are pre-paying fo a year long subscription to our website.
How we would like to treat it as is as follows:
Assuming the subscription is $12 for 12 months, What we do now is to put $12 into liabilities and then remove $1 each month for 12 months. This is ok for cashflow and balance sheet.
However, the problem arises when we have to start doing some accounting - here is why it arises.
Some of our customers would like a $12 invoice upfront rather than a $1 invoice a month. Hence, the $12 comes in as an invoice from us and then we are stuck as sometimes the $12 does not all get spent in the same calendar year.
So assuming the person subscribed in November 2018, then they would pay $12 in November and $10 of it would be for months in 2019. So in our books, it looks like 2018 was a great year and 2019 is a bad year 
How do we solve this?
Comments
mtopiwalla,
I think the easiest way for subscription accounting is to post all deposits (sales) under a liability called Deferred Revenue. You will need to keep a spreadsheet of your customers, payments and scheduled subscription. Every month you will need to make a journal entry to record revenue based upon how much was earned according to the spreadsheet (debit Deferred Revenue credit Sales). To set up the spreadsheet, the rows going down would customers and columns would be months. Divide the payment over the months based upon terms to determine amount recognized as income. The more advanced the excel skills the more automated you can make it using dates and subscription terms to have excel do the computations. As a side note, this is accrual accounting which may be different than how you report for income taxes. Hope this helps.
Mike G, CPA
www.mgfinancial.net
Better Service - Better Pricing
Thank you Mike for the detailed reply.
However, how can we make sure that the invoice of our company goes out as the invoice for the entire amount while not actually inserting the full income into our accounts (but rather as deferred income)
BR,
Murtuza
Murtuza,
I think that on a monthly basis you would need to make journal entries to move amounts from sales to deferred revenue so that the income you are recognizing is what you have actually earned. I have a client that does subscriptions. However, they do not use Wave for invoicing. So that is not a problem for us as all deposits are coded to a liability and then, monthly, a journal entry is made to recognize that months sales. One suggestion, and I have clients that do this, is to set up another business within your profile and use that business strictly for invoicing.
Mike G, CPA
Ah I see. Thank you for the suggestion.
Br
Murtuza
Hello Mike,
I have a quick question related to the topic that I hope you can answer. Would you ever defer revenue by days or weeks and not just month?
This is a Year Close scenario where we are subscription based (autopay) and get paid 3-4 figures at the beginning or halfway of the month for service-based work that is supposed to be performed over the next 30 days. For the entire year, it's not really a problem for Deferred Income but when the end of the year comes, there's some debate on if we are paid on Dec 15th, if we should Rev Rec just half of the Sale and then the last half in the new year.
And does the scenario change if there's a Refund/Termination policy that says there must be 15 days termination notice and there are no refunds for pre-paid work?
Pop_BookKeeper001,
I'm more of a tax expert than GAAP but here's my thoughts.
The deferring of revenue or recognition of should be based upon the terms of the subscription. For accrual based accounting you are to meet the "all events test". Meaning all conditions have been met to recognize either an expense or revenue. If your subscription is monthly then you would not meet the all events test until the close of the subscription period. I don't believe a cancellation policy would allow adjustments unless past cancellations can materially impact the revenue recognition. Reducing revenue for cancellations would purely be for GAAP purposes and not tax reporting.
Mike G, CPA
www.mgfinancial.net
I believe you should go on a month-to-month basis. I completely understand your want to "get it out of the way." However, you never know when another service could appear and you will be attracted to test it.
I subscribe to many magazines subscription using this software International and pay on a month-to-month basis. Since I will be out of the country for a month during which I will not be utilizing them, I have already cancelled my subscription (the actual expiration date is January 23rd) and will renew once I return. It allows me to be more flexible while also saving money.