Prepaid Services (Unearned Income, Unearned Revenue)

[rshgeneral]

Here is my understanding of how the general ledger transactions (independent
of how it actually happens in Gnucash) should occur for unearned income (aka
Prepaid Service, Unearned Revenue).  If I was maintaining a paper gl this is
what I would do. I apologize for any pedantic tone.  I'm merely striving for
clarity.

When I take money from a client for a prepaid service I would:
-Debit (Increase) my Checking account (Asset) to reflect the location of the
funds received.
-Credit (Increase) my Prepaid Services account (Liability) to reflect the
fact that this is not earned income because no service has yet been
provided.
-In the accounting equation A - L = C, my assets and liabilities have
increased the same amount, leaving my equity unchanged. This is as it should
be, I have not earned any income.

When I provide the service for the client I would:
-Debit (Decrease) my Prepaid Services account to reflect the removal of this
liability.
-Credit (Increase) my Sales (Income) account to reflect the provision of
services and the fact that the income is now earned.
-In the accounting equation, my assets have not changed, but my liabilities
have decreased.  This reflects  the fact that the income is now earned and
has now increased my equity.

Derek noted that, "Remember that a Liability is just a Negative Asset.  So
when you Process Payment you in effect make A/R negative, so it acts like a
Liability."

Okay, based on that statement,  it appears that the confusion is arising
because my accounting (under the advice on my father who is an accountant)
transactions are different than those performed by Gnucash.

For future reference, it appears you should not have a Prepaid Services
account.  When I Process a Payment I should transfer to Checking at that
time and not to a Prepaid Services account.  This will allow accurate
reporting and it will reflect the fact that the funds are in my checking
account.

Thank you Derek for your patience.



-- 
View this message in context: http://www.nabble.com/Prepaid-Services-%28Unearned-Income%2C-Unearned-Revenue%29-tp25015766p25047066.html
Sent from the GnuCash - User mailing list archive at Nabble.com.