Hi @Learner
Invoicing now for services (or goods) to be earned/supplied in the future is called ‘revenue in advance’. Sometimes my clients ask me to do this towards the end of their financial year. If the amount is material, the normal accounting approach is to raise an invoice against a balance sheet liability item called ‘Revenue in Advance’ rather than against ‘Revenue’ in the Profit and Loss statement.
The transaction will be:
DR: Accounts Receivable X.XX
CR: Revenue in Advance X.XX
When the invoice is paid into your bank account, the transaction will be as per a normal invoice payment
DR: Bank X.XX
CR: Accounts Receivable X.XX
That clears the accounts receivable and you have the cash in your bank account.
You recognize the revenue later (it could be the next financial year) in the Profit and Loss Statement by making a journal entry:
DR: Revenue in Advance X.XX
CR: Revenue X.XX
The revenue in advance liability account is now cleared to zero, and the income is recognized in the period that you earned it. The above approach applies the accounting principle of matching the timing of income and expenses. However, it is only worth applying the extra steps to recognize revenue in advance if the amounts involved are material (perhaps >5% of turnover).
The above principle also applies to public grants (and occasionally donations to ‘non-profit’ organizations) if these have conditions attached as to when the grant/donation is earned, even through it is paid in advance.
The transactions may vary slightly from my example if you pay sales taxes (e.g. VAT, GST, etc) on an invoice basis rather than on a cash basis. If sales tax is paid on an invoice basis, the amounts in the ‘revenue in advance’ and the journal entries will be net of taxes. You can set the Tax Summary or GST/VAT Report accordingly to correctly see your GST/VAT/Sales tax balance for any period.
Cheers… Richard