John,
I do not have a CPA but I do have practical accounting knowledge.
Typically, you pick cash-based accounting or accrual-based accounting and then stick with it.
Accrual-based accounting is far more common than cash-based accounting.
From Wikipedia: (Revenue Recognition)
“The revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.”
If you have received cash for a service project, but not yet earned it, you can debit the banking account where you deposited the cash and credit a liability account such as “customer deposits”.
Regards,
Hi,
I'm writing this to the users list, because I'm not sure what the
correct behavior should be, looking for an accountant to weigh in on that.
In the past year, we've started collecting payment up front as an
overpayment/prepayment, into a liability account. We keep it there until
the final invoice is sent for the project, and then we apply that
pre-payment to the last invoice.
As best I can tell, the Accrual-based reporting all looks correct, but
I'm thinking if I need to do a cash-based income statement, that
prepayment should show up somewhere (and I'm thinking it would be
taxable -- we're collecting the cash now and doing the invoice later --
but we need to pay tax on the cash basis).
I'm testing LSMB 1.4 to see how this works, and what I'm finding is that
the overpayment received does not show up anywhere on the income
statement, until it's received against an invoice. As I write through
this, I'm having a hard time seeing any other way to do it -- we need to
apply the overpayment to an invoice to know what account to put the
income into -- and when we do apply that overpayment, it will show up as
cash revenue for the date the payment is applied (I'm assuming, have not
verified this).
Is it routine in cash reporting to not report deposits as income? If so,
this should be fine for us. The biggest issue here is knowing when the
overpayment was applied -- you cannot see any indication of the
overpayment getting applied on the invoice itself, only on the general
ledger for the overpayment account.
Cheers,
John Locke
http://www.freelock.com
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