USA Question about prepaying for my services.

[JohnGalt]

Hello all -

I wasn't able to find this elsewhere so I thought I'd ask. I have a service business and I charge by the hour but in order to avoid chasing people for money, I'd like to offer a discount if they prepay. So, for example, If I charge $75 per hour but I'll offer a 10 percent discount and Client A sends me $500, how do I post it to my books? To further complicate matters, all hours are not the same. There are also priority levels so the $75 per hour would be for "medium" but if there is a "high" or "low" priority, the amount would be, say, $80 or $70, respectively. So, in my example, it doesn't seem like I can $500 because my intent is to give him a benefit for prepaying. I was thinking I could post the $500 and then give them a "bonus" of $50 so they end up with the 10 percent benefit or something like that but I can't seem to get my head around all the entries.

Any insight is appreciated!

Thanks

 

[Triest123]

If I charge $75 per hour but I'll offer a 10 percent discount and Client A sends me $500, how do I post it to my books?

=> $500 is unearned revenue since the service has not yet been rendered, you cannot treated it as service revenue. (Revenue can only be recognised when the service is rendered)

The 10 percent discount is a " trade discount" and is deducted from the service revenue.

Suppose it take 10 service hours for client A's job, the accounting entries are

Dr Cash $500
Cr Unearned reveune $500
(Being the advance payment from Client A)

Dr Unearned revenue $500
Dr Accounts receivable $175
Cr Service revenue ($75 x 10 hours x 90%) $675
(Being the service rendered to Client A)


Your Invoice format should be like this :


************************************************ Amount
Sevice rendered : (10 hours x $7.5) $750 (Service income)
Less : 10% Discount ($750 x 10%) $(75) (Trade discount)
Total : $675 (Service Income, net of trade discout)

Less : Deposit paid $(500) (Unearned revenue)

Amount due : $175 (Account receivable)