USA Revenue Recognition Question - Much Appreciated


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Hi everyone, I have a question regarding Rev Rec as I'm a new accounting manager and have been tasked with the revenue side of the income statement. Previously we recognized revenue on a cash basis so my job is to convert to accrual basis. My company is a Third Party Administrator (TPA) in the insurance industry and we handle all the admin stuff involved for the groups that sign up with the insurance company that we work for (enrollment, invoicing, collection of payments, etc). The way we make our money is that we charge a fixed percentage for the total premiums that we collect for the groups that signed up with the insurance company we work for.

Let me know if I'm on the right track. On 11/30/20 we invoiced a total of $5,000,000 for the January invoices to the groups (Insurance Coverage period 1/1/21 - 1/31/21). Let's say our TPA % is 5% which means if we collected 100% of the premiums in the future, we would earn $250,000. We will then remit to the Insurance company $5,000,000 minus the $250,000 (our cut) for $4,750,000. This is my understanding of the journal entries below. Keep in mind we're a TPA so 95% of the money we collect will be remitted to the insurance company, I'm listing what should show up on our Financials, not the insurance company's.

11/30/2020
AR - billings $250,000
Unearned rev $250,000

1/1/2021
Unearned rev $250,000
Recognized rev $250,000

Cash collected in the month of December
Cash $150,000 (5% of $3,000,000)
AR - billings $150,000

Am I'm correct in recognizing the all the unearned revenue in the month of January 2021? The insurance service is fulfilled by the insurance company in January 2021 (coverage period 1/1/21 - 1/31/21) so I'm kind of going off of when their service is performed since you don't recognize revenue until service is perform. The part that throw me off is our TPA service is really admin service for the insurance company, so not the service that a insurance company would perform (health, dental) so I'm not sure if it makes sense to recognize revenue based off of when the insurance company recognizes revenue.

Any help would be greatly appreciated!

Thank you.
 
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Joined
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Hi CaliCPA3
Let’s look at this piece by piece.
Because of your 11/30/2020 entry, your 11/30/2020 books show receivables that are not valid because you will not earn that income until January. The deferred revenue is also not valid because at 11/30/2020 you do not have a real liability because you have no January related liability at 11/30/2020.

To be continued

Kat
 
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Joined
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Hi CaliCPA3

As for the cash collected in December, before it is earned in January:
Dr Cash $150K
Cr Liability for unearned revenue $150K

Any comments so far?

Kat
 

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