Journal Entry for Prepaid Subscription Cost
A prepaid subscription is a pre-payment model that allows customers to pay for a service or product upfront. It provides users the flexibility of purchasing services ahead of time and not having to worry about additional costs or unexpected bills in the future. Prepaid subscriptions offer customers the convenience of being able to use the service immediately upon payment, as well as predictability.
By pre-paying for a subscription, businesses can lock in lower prices while having the peace of mind that their expenditure is taken care of when the service is needed. They will know exactly how much they are spending each month. With this model, customers can enjoy products and services with peace of mind knowing their subscription will not exceed their budget. For any business looking for budgeting certainty, a prepaid subscription might be the right choice.
Prepaid subscriptions are a smart way for businesses to plan ahead and ensure they have access to the services they need in advance.
Monitoring and recording the cost of prepaid subscription services is a time-consuming task for accounting professionals. Prepaid subscriptions are commitments made for goods or services to be received in the future and must be recognized as expenses when incurred or used.
On financial statements, prepaid subscriptions will be listed as ‘prepaid expenses, and when used by the business, it will be reversed as an expense. This helps show how resources are being managed effectively and accurately represent on the financial reports.
Journal Entry for Prepaid Subscription
The company paid the subscription for the services that will be received in the future. It is the prepaid subscription that will be recorded as the prepaid expense. It is the current assets record on the balance sheet.
The journal entry is debiting prepaid expenses and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Prepaid Expense | 000 | |
| Cash | 000 |
The prepaid expense is the current assets on balance sheet and it will allocate to expenses at the end of the accounting period which is usually the month’s end.
At the month’s end, company needs to calculate the amount of expense that needs to record in the income statement. The amount is equal to the total amount divided by the coverage periods.
The journal entry is debiting expense and credit prepaid expense.
| Account | Debit | Credit |
|---|---|---|
| Expense | 000 | |
| Prepaid Expense | 000 |
The current assets will be reversed to the expense on the income statement. The account will depend on the type of expense.
Example
Company ABC has used the phone service which requires the pay the subscription on a monthly basis. The company has decided to pay an annual subscription of $ 1,200 for a year of phone service. Please prepare journal entry for a prepaid subscription.
The company has paid the subscription fees of $ 1,200 which will allow it to receive the service for 12 months.
The company cannot record it as an expense when making payments to the supplier. It has to record as the prepaid account on balance sheet and it will be allocated to expenses on the income statement.
When making a payment for the subscription service, the company records the prepaid account.
The journal entry is debiting prepaid expenses $ 1,200 and credit cash $ 1,200.
| Account | Debit | Credit |
|---|---|---|
| Prepaid Expense | 1,200 | |
| Cash | 1,200 |
The prepaid expense is the current assets on the balance sheet, and it will increase when the company makes payment.
At the end of the month, the company needs to reverse the prepaid account to the phone service expense on the income statement.
The amount recorded depends on the total balance and subscription periods. Company paid $ 1,200 to cover the period of 12 months, so company spend $ 100 per month ($ 1,200/12 months).
The journal entry is debiting phone service expense $ 100 and credit prepaid expense $ 100.
| Account | Debit | Credit |
|---|---|---|
| Phone Service Expense | 100 | |
| Prepaid Expense | 100 |