Struggling with Invoicing Prepaid Service

[David Cousens]

Kevin,

I had a rethink on your problem particularly with regard to the 
treatment of the unearned revenue and conversion to income. As far as I 
can see your HST in Canada appears to be similar to GST in Australia so 
it should most likely appear on your original invoice (You may need to 
check your local tax regulations/laws for detailed requirements. The 
exact names used for the accounts below may also be slightly different 
in Canada depending on local practice by accountants.

I had a look at the treatment of Unearned Revenue in my Financial 
Accounting textbook and I think the following sequence of transactions 
should adequately record the processes you described previously and 
should apply for most jurisdictions with a similar tax structure.

When you issue the invoice for prepayment to the customer:

Asset:Accounts Receivable  Debit  5650
Liability:HST              Credit  650
Liability:Unearned Revenue Credit 5000

On receiving payment from the customer:

Asset:Accounts Receivable  Credit 5650
Asset:Bank                 Debit  5650


On completion of some of the work (e.g. 3000 worth):

Liability:Unearned Revenue Debit  3000
Income:Services            Credit 3000    ( may also be Revenue)


I would recommend using sub-accounts of Unearned Revenue and 
Revenue:Service for each individual customer so you can track the work 
remaining value  and the completed value for each customer.

Regards

David Cousens