Revenue recognition and refunds questions

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Hello everyone,

I have some questions about revenue recognition and credit noting in accrual accounting for my company. To make my questions understandable, let me use an example.

Suppose, a web TV service is offered through quarterly subscriptions. The company invoices in advance on the first of the calendar quarter. Revenue is recognized in the month the service is provided.

Invoice Date: 01.12.2013
Beginning.........End....................Price
01.10.2013......31.10.2013.......10 << revenue recognized in Oct 2013
01.11.2013......30.11.2013.......10 << revenue recognized in Nov 2013
01.12.2013......31.12.2013.......10 << revenue recognized in Dec 2013

1) Can the revenue be recognized on the first of the month, or does it have to be the last day of the month?


When, say, the customer decides to subscribe to an extra channel in the middle of the quarter, the company invoices the new channel on the following quarterly invoice (shown below).

Invoice Date: 01.01.2014
Beginning..........End..................Price
11.12.2013.......31.12.2013......6 << New channel added in the middle of Dec.
01.01.2014.......31.01.2014......20 << revenue recognized in Jan 2014
01.02.2014.......28.02.2014......20 << revenue recognized in Feb 2014
01.03.2014.......31.03.2014......20 << revenue recognized in Mar 2014

2) When should revenue for the new channel be recognized?

3) I want to recognize this revenue on Jan 1. Is this fine considering the invoicing occurred on Jan 1?


Customers can cancel extra channels at any time, and the subscription runs until the end of a month. They are refunded (by credit note) for any future months that were already invoiced.

Suppose the customer decides to cancel his extra channel in Jan. The company refunds him the cost of the extra channel for Feb and Mar (see credit note below).

Credit Note Date: 26.01.2014
Beginning........End....................Price
01.02.2014.....28.02.2014........-10
01.03.2014.....31.03.2014........-10

4) Can I simply make the journal entry below even though these revenues have not yet been earned or recognized?
Cr. Accounts Receivables
Dr. Refund Expense

Or, should I make the following entry?
Cr. Accounts Receivables
Dr. Unearned Revenue

Thank you very much in advance.
 

kirby

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In general, the problem with booking income on the first day of the month is that if you do so then you need an adjusting entry for each change in that month's income.

Versus - if you just wait till month end you can book the correct entry once.
 

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