“I notice that my ISP and the phone company seem to be sending out bills at least 30 days before a service period begins. I’d like to do something similar for my retainer clients, but how would I record receivables on my books that aren’t really due yet? And would I have to pay taxes on these receivables if I’m on an accrual basis?”
Mike: If you can convince your clients to pay you in advance, accounting for the transaction is no problem. You simply record the amounts billed in advance on your balance sheet as “deferred revenue” (a liability), and then recognize the revenue on your income statement when you provide the service. In the software industry, for example, companies typically invoice in advance for a whole year of maintenance and then recognize the earned portion every month or quarter.
Taxes are also no problem, as long as you’re reporting income on an accrual basis. Even though you’ve sent an invoice and perhaps even collected the cash, the revenue isn’t taxable until you’ve earned it by delivering services or goods. (You can see why investors love companies that manage to get their customers to fund the business–there are a lot of advantages to getting paid in advance.)
The ASK MIKE is a weekly column providing answers from finance and small business expert Michael Gonnerman. Mike has served as a trusted advisor to hundreds of technology CEO’s and investors as well as served on more than two dozen corporate boards.
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