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3 min 56 sec
0:00
Half up front
0:24
Why a deposit is a debt
0:57
The entry
1:18
Earning it bit by bit
1:57
Why it matters
2:26
Deposits in Beeswax
3:03
Recap and quiz
Accounting 101
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Getting paid
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Episode 11
Deposits and Unearned Revenue
(Money in the bank. Still a debt.)
Juniper Yoga pays Maya half up front for a website she hasn't built yet. Why that deposit is a liability, and how it turns into revenue as the work gets done.
deposits
unearned revenue
liabilities
Transcript
0:00
June. A new client, Juniper Yoga, wants a website. Six thousand. Maya asks for half up front, before she starts. They pay the same day.
0:11
Three thousand, in the bank, for work she hasn't done yet. That's income, surely? Well. This is the episode where we find out it isn't.
0:24
Think about what just happened. Juniper paid for a website. Maya hasn't built it. If she vanished tomorrow, they'd want their money back.
0:34
So right now, Maya doesn't own that three thousand. She owes a website. And something you owe is a liability.
0:43
It goes by several names. Unearned revenue. Income received in advance. Deferred income. Or, if you're reading the international standards at bedtime, a contract liability.
0:57
The entry, then. Bank goes up three thousand. And a liability, unearned revenue, goes up three thousand. Debit bank. Credit unearned revenue.
1:09
Cash in. Revenue, not yet. The equation balances, as ever. Assets up, liabilities up.
1:18
Then Maya does the work, and the liability turns into revenue, bit by bit.
1:24
By the end of July, half the site is built. So half the deposit is earned. Debit unearned revenue, fifteen hundred. Credit services income, fifteen hundred.
1:36
In August, the site launches. The rest of the deposit is earned, and Maya invoices the final three thousand as normal.
1:45
June's revenue: nothing. July: fifteen hundred. August: four and a half thousand. Six thousand in total, each part landing when it's earned.
1:57
Why fuss? Because if Maya counted the deposit as income in June, June would look brilliant, July would look terrible, and she might pay tax on money she hasn't earned. Possibly money she'd have to give back.
2:12
Same goes for that annual retainer paid up front. Eighteen thousand in January is not eighteen thousand of January revenue. It's fifteen hundred a month, released as each month goes by.
2:26
In Beeswax, there's no special deposit button. You use the standard method, and it's all built in.
2:33
First, add a liability account to your chart of accounts. Call it unearned revenue.
2:39
Then invoice the deposit, with the line coded to that liability account, instead of income. Beeswax lets an invoice line go to a liability. That's exactly why.
2:51
As you earn it, move it across with a manual journal. Debit unearned revenue, credit services income. And your profit and loss tells the truth, month by month.
3:03
So. Money received before the work is a liability, not revenue. It becomes revenue as you do the work. Deposits, annual retainers, prepaid packages. Same rule.
3:17
Quick one. A client pays a four thousand deposit in September. Maya does a quarter of the work that month. How much revenue in September? And what's left as a liability?
3:28
Have a think.
3:32
One thousand of revenue. A quarter of four thousand. And three thousand still sitting in unearned revenue, waiting to be earned.
3:42
Money in the bank, and still a debt. Accounting, everybody.
3:47
Next time: cash versus accrual. Two ways of counting the same month, and why they tell completely different stories.