My client, Chelsea, owns and operates a simple local fitness business that provides services for both the class/group setting and personal/one-on-one setting.
Chelsea’s locations are in apartment complexes and condominiums.
For the most part, Chelsea receives her revenues prior to actually performing the services; these are also known as prepayments.
So, to keep things simple, within QuickBooks, I have created a deferred income (current liability) account to book all of the monthly bank deposits to (I say “monthly” because I only need to update her books on a monthly basis).
Then, I login to her record-keeping portal online to find out exactly what services she has performed (earned) within that same entire month.
After I obtain this information (which means ascertaining the dollar value of her fitness services performed), I go back into QuickBooks and post an adjusting journal entry (a summary entry for that entire month, dated at the end of the month):
Debit to the Deferred Income account (to lower this liability value).
Credit to the Sales account (to raise this value).
Now, because of this bookkeeping process explained above, Chelsea’s business will not be overstated on revenues, because she has not earned all of the prepayments until actually performed.
Important Note: Keep this in mind if you have to file a sales tax return as well for this type of activity (advance payments for sales); you should verify if you have to report your sales on a cash received or an accrual earned basis or “in a consistent manner that accurately reflects the realization of income” with the state Comptroller.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.