Prepaid Revenue

Prepaid Revenue

Determining revenue earned for a period

Profit = revenue earned in a particular period less expenses incurred in that period of tiem

Prepaid Revenue

• When a Trial Balance is Prepared , accounts reflect the cash transactions that have taken place within the reporting period.

Hey! I am off to Africa!

Buy air tickets!

• When would I buy the plane tickets from Australia to Sth Africa?

• I need to attend our son’s wedding on July 15th, 2012

Buying plane tickets

• Well in advance for my planned future trip• Cash is paid up front• Airline has accepted the money for a future

booking (We used Qantas!)• Cash is paid up front with the promise of

something in the future.

Therefore.....

• Qantas (airline) could have $1000’s of cash that has not yet been earned

• Should this be treated as revenue• NO!• The business has not yet fulfilled its

obligations!• Therefore the business has not yet earned its

revenue.

I love gardening!

Looking for magazines to help with gardening.

Why buy in advance?

•What are my options if I like Better Homes and Gardens and want it delivered to my home?

What if?• I buy the two year subscription on July 1st

2010• At 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?

How do we classify prepaid revenue?

• When the payment for the magazine subscription is paid, have I received any magazines?

• When will I receive my first magazine?

A personal experience!• Six years 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.

1. For how many more months should I really have received the magazine?

2. Will they, should they, refund the unused subscription amount?

Questions!

Happy ending!• The magazine company did refund the unused

amount.• Therefore............

How is prepaid revenue classified?

Prepaid Revenue

= current liability

At time when prepaid revenue is made, it is all placed in a Prepaid Revenue Ledger Account.

Prepaid Magazine Subscriptions

1st July 2010

Liability becomes a revenue when....

• The commitment is fulfilled, the liability will be eliminated

• The revenue is recognized as being earned• It 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.

Let’s assume

Better Homes and Gardens has $20,000 prepaid magazine subscriptions. How would it look in the ledger accounts?

Prepaid Magazine Subscriptions

Magazine Subscriptions

1st July 2010

Nb On Balance Day, the revenue that has been consumed is pulled out of prepaid revenue ledger and placed in the appropriate revenue account.

Cash at Bank $20,0000

Can you work out the general journal entries?

Prepaid magazine subscription revenue

20000

20000Magazine revenueAdjusting entry for magazine subs earned

Prepaid magazine revenue

P and L summary

Closing entry

20000

20000

Prepaid Magazine Subscriptions

Magazine Subscriptions

1st July 201030th June 2011

Nb On Balance Day, the ledger accounts would look like the above.

Cash at Bank

$20,0000

Magazine Subs Revenue

Prepaid Magazine Subs

$20,0000

$20,000030th June 2011

30th June 2011P and L Summary

$20,0000