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Established Member

Service Revenue Recognition

We have a home maintenance service business with an annual "subscription" fee.  A customer pays us $1200 per year, upfront. We do an annual inspection of their house at the beginning of the subscription, we also do two maintenance visits per year to check on the house, the customer also gets 4 hours of handyman service that they can use throughout the year at their discretion, and we are on call for additional handyman projects that we will charge for. How should I recognize the revenue? I was thinking that I would record the $1200 payment to deferred income liability and then recognize $100 each month with a journal entry to debit deferred income and credit to service revenue. But the reality of the situation is that customers will get their inspection in month one, and probably use their 4 hours of handyman service within the first month or two. So would it make more sense to recognize the $1200 upfront? I don't want to make it too complicated, with some irregular revenue recognition calculation. Thoughts?

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Re: Service Revenue Recognition

Your solutions depends on the tax basis that you file your taxes on.  If you are on an accrual basis, the deferred revenue account is correct and you would recognize 1/12 per month. 

 

If you are on the cash basis for tax purposes, you could still recognize monthly income using the deferred revenue account, but at the end of the year, you would need to zero out the balance in deferred revenue and recognize as income since you received the cash.  You would then reverse your entry on 1/1 and start over.