Chris writes:The customer should credit cash $80 and debit prepaid expenses (an asset
> So if I pay $80 for a year of hosting on October 1, you would
> materialize $20 in income on that year, and $60 the next year. Most of
> the time this is not really material but there are cases when it could
> be, since recognizing all income at the beginning of the contract can
> inflate earnings when clients are gained and inflate losses when
> customers cancelled.
account) $80. He should then transfer $6.67 from prepaid expenses to
expense each month. The hosting company should debit cash $80 and
credit prepaid income (a liability account) $80. It should then
transfer $6.67 from prepaid income to income each month.
In practice such a small transaction is likely to be treated as
completed immediately, but if the amount were $800,000 you'd want to do