Very glad to find this site, and I hope my question is not too basic.
I'm teaching myself book-keeping so that I can keep books properly for my small business (musician and IT consultant). As the first of these lines of business is full of people who loathe keeping their books, and I know a lot of them, there could be some £ or at least favours in it for me in the long term...
I found a great introductory resource here http://www.dwmbeancounter.com/moodle/ which finally got me understanding double-entry...
My question is about keeping track of customer accounts before or outside the invoicing/payment process. What I mean is this: in my business the actual performance of work often isn't accompanied (in time) by an invoice, and a piece of work (what I call an engagement) doesn't have a 1-1 relationship with an invoice:
a) Students can pay for X number of lessons in advance; I then have to deliver these lessons (liability) - and full delivery against the prepayment can be affected by e.g. illness/re-arranging due to their holidays or mine. b) Larger organisations can have me work for them (e.g. as an accompanist) on the basis that I invoice them e.g. at the end of each calendar month - for amounts that vary each month.
If I understand what I've read correctly, then I should account for this like so:
a) Receive pre-payment. Debit Cash or Bank, credit Unearned Revenue (a liability account). Each engagement performed against the prepayment debits Unearned Revenue, credits a Revenue account (I'd use Teaching Income) - so revenue is only recognised as work is performed. b) Work before payment. On each engagement, debit Unearned Revenue, credit a Revenue account (e.g. Accompanist Income). When the invoice is raised at the end of the month, credit Unearned Revenue, debit Accounts Receivable.
My questions about this (apart from the obvious - am I making book-keeping sense so far or are there glaring mistakes? ) are:
1. The way I've described it, the balance of the Unearned Revenue account will be not be strictly Unearned Revenue, but the net balance of unearned revenue and uninvoiced revenue, since both make postings to it. Some gut feeling (which may just be due to unfamiliarity with bookkeeping) makes me want something different: a separate asset account called Uninvoiced Revenue or something:
Prepayments would credit the Unearned Revenue liability account, and performance debit this account Work against future invoices would debit the Uninvoiced Revenue asset account instead of the Unearned Revenue liability account - and the subsequent invoice would credit Uninvoiced Revenue of course
This keeps the two separate. Would this be good practice?
2. How to make this work at the customer detail level. It seems that if I'm going to keep track of accrued/deferred income I'd need an extra subsidiary set of customer accounts, over and above the customers' accounts in the Acc Receivable ledger. These would keep track of what each customer owes me/I owe them, outside the invoicing process. So at any time I can look at the piano student's account (a above) in this ledger and see that he paid me £150 but I've only delivered £100-worth of lessons; or look at Big Choral Company's account (b above) and see that I've performed £160-worth of work this month, and this is what should be invoiced. Is there such a thing/ledger, and what is it called? Just to keep me (hopefully) in line with the terminology and practices used by bookkeepers.
The "accruals" or "matching concept" certainly supports your argument that income as well as costs should be applied in the accounting period they are incurred.
There is another concept, ie "materiality", which discourages separate accounting for small (immaterial) items.
My wife has taught piano privately for quite a long time, pupils mostly pay up-front at the beginning of the half term and she then gives the lessons. I do her books and we have never bothered to treat the fees paid as prepayments except at the year end, though these are few as her year end is in the summer holidays.
I suppose it depends upon how big your business is, also to what extent the accruals offset the prepayments as it will only be the net difference you should be worried about. Having worked for a firm of consulting engineers, I know that with large commercial contracts, possibly spread over several years it is often necessary to build in stage payments. But if the numbers are relatively small, ie within one person's income, I think worrying about it could be a lot of additional effort for unnecessary accuracy.
Be interesting to see what others have to say, could be this happens all the time and I am totally wrong.
Phil
(excuse the edits) -- Edited by Scrat on Tuesday 2nd of November 2010 12:49:07 PM
-- Edited by Scrat on Tuesday 2nd of November 2010 12:51:43 PM
I see what you mean about "materiality". My business is not that big (I probably do less teaching business than your wife, as I'm just starting out and building it up), so as you say, from the materiality point of view accruing/deferring income is really not that important a question, unlike with the big engineering firm you mentioned.
But I'm a sucker for having computers do things for me so I don't have to do them myself - and I hate having to look through the scrawls in my diary to figure out how much I should invoice someone (when I've worked on the basis of subsequently invoicing), or going out the door to a lesson and wondering whether I should ask to be paid for this one or whether it's covered by an up-front payment ages ago (when, since the time they paid me I was on holiday one week, they were ill one week, and so on and so forth - too much to keep track of).
So I think the reason I'm asking is less to do with applying income to exactly the right period in year-end accounts, and more to do with the practical value of keeping accounts as I go of work done irrespective of whether it's been invoiced yet or paid for up-front. Seems to me I need to keep an extra account for each customer, and I wonder what this ledger would be called - if it is a ledger!
A familiar problem, my wife used to just keep a little note book to hand, she always knew exactly who owed her money and who was owed lessons. Only once did I have to go round to ask for payment on her behalf and only once did she have a bad debt.
Make sure you keep the pupils and/or mums+dads up to date on the position (verbally as they leave is ok, or ring up once in a while). You'll soon learn who the problem customers are, they are worth being kept up to date by letter as it is amazing how their memories fail!
Good luck with building the business up - good thing about private teaching is that the pupils come to you and you stop as soon as they go out the door, no overheads! You probably realised this already but you should think about having public liability insurance for pupils entering your home (I'm assuming you teach from home) - fortunately my wife's home insurance (Privilege) covers her for free.
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