Accounting for Membership Fees
Membership fees are the amount of cash that company collects from the customers in advance in exchange to provides services in the future.
They are typically charged on a yearly basis and can be used to cover the costs of running the organization. Membership fees can also be used to fund special projects. For example, a library might use membership fees to pay for new books or a museum might use them to fund an exhibit.
Organizations often offer different levels of membership, with higher fees providing greater benefits, such as access to exclusive events or discounts on merchandise.
Some organizations also offer Lifetime memberships, which provide access to all benefits for as long as the member remains active. Membership fees are an important source of revenue for many organizations and can help to ensure that they can continue to operate.
In order for a company to stay in good financial standing, it is essential to keep track of all money coming in and going out. This includes membership fees. While it may seem like a small amount of money, over time these fees can add up to a significant amount of revenue.
In addition, membership fees are typically recurring, which means that they provide a steady stream of income. As a result, companies should be sure to record membership fees as revenue in their accounting records. Doing so will ensure that the company is able to accurately track its finances and make sound decisions about spending and investment.
Accounting for Membership Fees
Membership fees are the amount of cash the company receives before delivering the subscription service to the customers. The company may provide discounts to customers in order to encourage them to pay for longer periods of them.
The company wants to get the payment in advance, so it is safe that the customers are really purchasing the service. It is not hard for them to promote the product.
In addition, it also helps the company to gain the advantage from the cash that the company receives in advance. It allows the company to use the cash to invest or expand the business operation.
In accounting, the company needs to properly allocate the membership fees to the correct accounting period. It is recorded as unearned revenue when the company collects cash from the customers. And it will be reversed to the revenue when the company delivers service to the customers.
Journal Entry when receiving membership fees
When the company received cash from the customers, it will be recorded as unearned revenue which is the liability on the balance sheet.
The journal entry is debiting cash and credit unearned revenue.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Unearned Revenue | 000 |
The cash increase reflects the cash received from the customer and increases on the balance sheet. The unearned revenue is the liability on the balance sheet.
Journal entry at the end of the accounting period
The membership will be exchanged for the service over a period of time. So the amount of unearned revenue will be reversed to the revenue for the same period. It is should be allocated based on a straight line.
The journal entry is debiting unearned revenue and credit revenue.
| Account | Debit | Credit |
|---|---|---|
| Unearned Revenue | 000 | |
| Revenue | 000 |
The revenue is the amount on the income statement. The unearned revenue is decreased based on the revenue record. At the end of the membership period, the unearned revenue will reach zero balance.
Example
Company ABC has received the membership fees amount of $ 600 which covers a period of 12 months. Please prepare the recording for membership fees.
The company receives a cash amount $ 600 from the customer. The company cannot record the revenue when receiving cash from the customer.
The journal entry is debiting cash $ 600 and credit unearned revenue $ 600.
| Account | Debit | Credit |
|---|---|---|
| Cash | 600 | |
| Unearned Revenue | 600 |
At the end of the month, the unearned revenue will be reversed to revenue on the income statement.
As the unearned revenue is covered for 12 months, so the amount of fees is $ 50 per month ($ 600/12 months).
The journal entry is debiting unearned revenue $ 50 and credit revenue $ 50.
| Account | Debit | Credit |
|---|---|---|
| Unearned Revenue | 50 | |
| Revenue | 50 |
Important of Membership Fees
There are a number of reasons why membership fees are important to companies.
First, they help to increase revenue. This is because memberships typically involve a monthly or annual fee that is paid by the member. This regular income can be used to cover the costs of running the company, such as marketing and advertising, as well as to fund new initiatives and projects.
Second, membership fees help to create a sense of loyalty among customers. Those who have paid a fee to join a club or organization are typically more likely to be loyal to that company and its products or services. This loyalty can lead to repeat business and word-of-mouth referrals, both of which are essential for long-term success.
Finally, membership fees can also help to cover the costs of providing discounts and other perks to members. This allows companies to offer their best customers an incentive to remain loyal, while also generating additional revenue. In sum, membership fees are an important source of income for many companies and can play a key role in their long-term success.