Ticket sales are prepayments for your business as a professional services provider. They are cash receipts that you can’t record as revenue until a later time based on accounting rules on revenue recognition. Instead of having ticket sales count as a benefit, a seeming proxy for revenue, you actually record them as a liability of unearned revenue at the time of the ticket sales because you’re now obligated to hold the event associated with the ticket sales sometime in the future. It is only after you perform the event duty, you can recognise the ticket sales as revenue, which cancels the earlier recorded liability.
Generally Accepted Revenue Recognition Principle
There are two accounting methods for revenue recognition: cash basis and accrual basis. The cash basis is simple and intuitive, stipulating that you recognise revenue whenever you receive a cash payment, Recognising revenue this way potentially distorts financial statements as they can’t show whether you performed a professional service at the time of the revenue recognition. The accrual basis is more reflective of the business reality, allowing you to recognise revenue only when it is earned and recognisable with any of the service-associated expenses occurring at the same time, regardless of actual cash receipts. Using the accrual basis as the generally accepted revenue recognition principle, you can distinguish between receiving cash from ticket sales and later performing the service related to the ticket sales.
Unearned Revenue as a Liability Account
When you receive prepayments in cash from ticket sales for an event scheduled to take place at a later time, using the accrual basis, you debit the cash account in the amount of the ticket sales and credit the same amount to a liability account, called unearned revenue. This liability account exists because you’re now obligated to ticket holders to carry out the event related to the ticket sales and perform your service to actually earn the revenue. If the event has yet to take place after the end of the current accounting period, you can’t recognise any revenue for the period, despite the ticket sales and increased cash holdings as recorded.
Complete Service and Recognise Revenue
While performing the service to earn the revenue, you incur certain expenses at the same time. There is also the matching principle involved in revenue recognition, requiring revenue to be recognised in the same period in which related expenses occur. Once you complete the service for the ticket holders, you can fully recognise the revenue in the amount of the ticket sales. The accounting process for revenue recognition is to debit the previously recorded unearned revenue and credit the revenue account in the same amount, effectively cancelling the liability of unearned revenue. You should cancel portions of the unearned revenue liability accordingly when some customers require a ticket refund. Or you should cancel it entirely if you have to cancel the event and return the proceeds of all ticket sales. Compliance with revenue recognition rules helps you set up accounting records that can accurately interpret what really happens in each business transaction. When you can differentiate among cash prepayments, unearned revenue and recognised revenue, you gain the accounting clarity that serves as a useful business reference to achieve target financial results.