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<http://en.wikipedia.org/wiki/Accrual_accounting>together
with matching
principle <http://en.wikipedia.org/wiki/Matching_principle>. They both
determine the accounting
period<http://en.wikipedia.org/wiki/Accounting_period>,
in which revenues <http://en.wikipedia.org/wiki/Revenues> and
expenses<http://en.wikipedia.org/wiki/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 <http://en.wikipedia.org/wiki/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,
jhagen...@gmail.com
On Thu, Dec 26, 2013 at 2:34 PM, John Locke <m...@freelock.com> wrote:
> 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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