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EBFinancials
December 28, 2018

Balance Sheet Question

  • December 28, 2018
  • 2 replies
  • 0 views

Hello,

My business sells subscription-based service online
it offers few plans that varies by time - 3, 6 and 9 months plans
When client pays for let's say 3-month plan, the business collects the payment upfront (via cc) for the full period. Then, at the end of the period if the client doesn't cancel the subscription renews.
Are those future recurring renewals should be included in the Account receivable line in the Balance Sheet.
Are those future renewal transactions considered as 'sales made on credit'?

Let me know if this question doesn't apply to this section of the community. I couldn't find a section for general accounting/bookkeeping questions.

    2 replies

    Rustler
    Rustler
    December 28, 2018

    A renewal is not a sale until it renews.

    You should be taking an advance payment for the time period, lets say 3 months, and that posts to a liability account
    each month you make the sale for that months share and pay it with the advance payment from the liability account.

    E
    EBFinancialsAuthor
    December 29, 2018

    @RustlerSo I understand that a future renewal is not reported in any place in the books until the payment actually made?, Is the reason because the customer can still cancel before the renewal?

    We charge the customer upfront, let's he buys a 3-months plan - So you are saying we should list this payment  in the cash line item in the Balance Sheet?

    So let's say for example that I create the Balance Sheet during the 2nd month of the cusotmer's 3-months plan - So in such case I will put the amount of the remaining two-months in the Liability Account?

    Is it Liability because I still owe the customer service for two months?

    Rustler
    Rustler
    December 29, 2018
    @EBFinancials wrote:

    @RustlerSo I understand that a future renewal is not reported in any place in the books until the payment actually made?, Is the reason because the customer can still cancel before the renewal?
    yes
    We charge the customer upfront, let's he buys a 3-months plan - So you are saying we should list this payment  in the cash line item in the Balance Sheet?
    whether you deposit the funds to cash or checking is up to you
    So let's say for example that I create the Balance Sheet during the 2nd month of the cusotmer's 3-months plan - So in such case I will put the amount of the remaining two-months in the Liability Account?
    It will already be in the liability account since that is where it was posted to when received
    Is it Liability because I still owe the customer service for two months?

    yes

     

    M
    Malcolm Ziman
    December 30, 2018
    @EBFinancials wrote:


    Let me know if this question doesn't apply to this section of the community. I couldn't find a section for general accounting/bookkeeping questions.

     

    The "sections" are meaningless (to me). I don't know why they force people to choose one

     

    In accrual based accounting, income is raised when goods/services are delivered.  For a subscription-based service, that would be probably be once a month. 

    For cash based accounting income is raised when cash is received.

    So the answer depends on which method you use

    E
    EBFinancialsAuthor
    December 30, 2018
    @Malcolm Ziman

    In accrual based accounting, income is raised when goods/services are delivered.  For a subscription-based service, that would be probably be once a month. 

    For cash based accounting income is raised when cash is received.

    So the answer depends on which method you use

    We charge the customer when he/she makes the order, even if the order will spread over several months. For example if it is a 3-months plan (subscription) then we charge upfront for the full period (3-months).
    So basically we receive the income at the point of sale (order) but provide the service over the course of three months from the date of payment.

    Given this is the scenario/workflow - Which accounting method would fit better?

    M
    Malcolm Ziman
    January 1, 2019
    @EBFinancials wrote:
    We charge the customer when he/she makes the order, even if the order will spread over several months. For example if it is a 3-months plan (subscription) then we charge upfront for the full period (3-months).
    So basically we receive the income at the point of sale (order) but provide the service over the course of three months from the date of payment.

    Given this is the scenario/workflow - Which accounting method would fit better?

    With the accrual method, technically a subscription service accrues constantly, every day, but for businesses that look at monthly performance, a monthly raising of income would make sense for them. If you don't need to look at monthly performance, then you may as well just use the cash method. It's the easiest, and it all evens out on the long term. Accrual based would be tricky and may not be worth the extra time and effort

    With the cash method there is no liability for a prepayment (that there is with the accrual method) as the income is recognized when the cash is received

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