On Mon, May 27, 2013 at 8:32 AM, John Hasler <[email protected]> wrote:
> Chris writes:
> > 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.
>
> The customer should credit cash $80 and debit prepaid expenses (an asset
> 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
> it right.
However such an approach restricts you to accurate accounting information
on a monthly basis. Arbitrary date ranges (revenue vs expenses of the
third week of January) won't work very well. What we'd like to do
eventually is essentially have the transfer taking place continually over
the period of time, on an actual days basis, as a reporting matter. After
the transaction's completion date, we just treat it as having been
completed. Before it's start date, we treat it as not existing yet. In
between we treat it as partially complete and adjust on an actual days
basis. In this view you'd have $80 going into unearned income at first,
and then an $80 going into income *continuously* over the next year,
assuming the customer can't cancel and get some money back. Then you could
run reports on any range of dates and the adjustments would show properly.
Now, if they could cancel at the end of each month, you could break it
down into 12 month-long transactions and this would still just work.
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