Balance Sheet Question

A renewal is not a sale until it renews.

You should be taking an advance payment for the time period, lets say 3 months, and that posts to a liability account
each month you make the sale for that months share and pay it with the advance payment from the liability account.

@RustlerSo I understand that a future renewal is not reported in any place in the books until the payment actually made?, Is the reason because the customer can still cancel before the renewal?

We charge the customer upfront, let's he buys a 3-months plan - So you are saying we should list this payment  in the cash line item in the Balance Sheet?

So let's say for example that I create the Balance Sheet during the 2nd month of the cusotmer's 3-months plan - So in such case I will put the amount of the remaining two-months in the Liability Account?

Is it Liability because I still owe the customer service for two months?

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@EBFinancials wrote:

@RustlerSo I understand that a future renewal is not reported in any place in the books until the payment actually made?, Is the reason because the customer can still cancel before the renewal?
yes
We charge the customer upfront, let's he buys a 3-months plan - So you are saying we should list this payment  in the cash line item in the Balance Sheet?
whether you deposit the funds to cash or checking is up to you
So let's say for example that I create the Balance Sheet during the 2nd month of the cusotmer's 3-months plan - So in such case I will put the amount of the remaining two-months in the Liability Account?
It will already be in the liability account since that is where it was posted to when received
Is it Liability because I still owe the customer service for two months?

yes

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@EBFinancials wrote:

Let me know if this question doesn't apply to this section of the community. I couldn't find a section for general accounting/bookkeeping questions.

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The "sections" are meaningless (to me). I don't know why they force people to choose one

In accrual based accounting, income is raised when goods/services are delivered.  For a subscription-based service, that would be probably be once a month. 

For cash based accounting income is raised when cash is received.

So the answer depends on which method you use

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@Malcolm Ziman

In accrual based accounting, income is raised when goods/services are delivered.  For a subscription-based service, that would be probably be once a month. 

For cash based accounting income is raised when cash is received.

So the answer depends on which method you use

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We charge the customer when he/she makes the order, even if the order will spread over several months. For example if it is a 3-months plan (subscription) then we charge upfront for the full period (3-months).
So basically we receive the income at the point of sale (order) but provide the service over the course of three months from the date of payment.

Given this is the scenario/workflow - Which accounting method would fit better?

@Rustler
whether you deposit the funds to cash or checking is up to you
Do you mean when entering it in the corresponding account in the Chart of Accounts?
Is checking means  bank checking account in the Chart of Accounts? or like someone paid via check?
We charge by credit card on our website, so there is no paper check involved

@Rustler
It will already be in the liability account since that is where it was posted to when received
So when we charge the customer for let's say the 3-months plan, we post it in both sides of the accounting equation - In the assets side ( as either cash or checking as you mentioned) and  on the other hand in the current liabilities account?

Double entry accounting always has two sides to the transaction.  You should work with a consultant to get things running correctly

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@EBFinancials wrote:

We charge the customer when he/she makes the order, even if the order will spread over several months. For example if it is a 3-months plan (subscription) then we charge upfront for the full period (3-months).
So basically we receive the income at the point of sale (order) but provide the service over the course of three months from the date of payment.

Given this is the scenario/workflow - Which accounting method would fit better?

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With the accrual method, technically a subscription service accrues constantly, every day, but for businesses that look at monthly performance, a monthly raising of income would make sense for them. If you don't need to look at monthly performance, then you may as well just use the cash method. It's the easiest, and it all evens out on the long term. Accrual based would be tricky and may not be worth the extra time and effort

With the cash method there is no liability for a prepayment (that there is with the accrual method) as the income is recognized when the cash is received

If only life was so black and white {smile}

Words are used without considering the legal definition, and believe me if you sit down with an auditor or worse a tax court, those definitions matter.  The Supreme Court, in a tax case, defined them.

Pre-payment - There is no obligation to return the funds, but there is an obligation to perform the service/sale at some later date.  that is taxable cash or accrual when received

Deposit
Refundable Deposit - the customer (or the business) can cancel and you have to refund the money.  That attaches a liability to the transaction and it is income when earned, cash or accrual.

Non-refundable Deposit - the customer can cancel the contract and but will not get his money back and there is no obligation to fulfill the contract if he cancels.  that is income when receive cash or accrual.

So it really depends on the subscription terms, if the customer can cancel during the subscription term and get a pro-rated refund, then the subscription has a liability attached to it, and the deposit is income when earned.

IMO it is safer to consider all of them as refundable deposits, unless the contract specifically states otherwise

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@Rustler wrote:

"Non-refundable Deposit - the customer can cancel the contract and but will not get his money back and there is no obligation to fulfill the contract if he cancels.  that is income when receive cash or accrual."

To say that it is income when received on the accrual basis, is not in accordance with the well established accounting principle, which is that income is recognized upon delivery of goods or services.  Given that delivery has not yet happened when a deposit is received,  there is no income when it is received,  non-refundable or refundable.   The name of the allocation may be different; Deferred Revenue vs Refundable Customer Deposits, but they are both liabilities on the balance sheet, not income