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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