{"id":3531,"date":"2020-10-20T21:44:34","date_gmt":"2020-10-20T21:44:34","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&p=3531"},"modified":"2020-11-09T19:24:48","modified_gmt":"2020-11-09T19:24:48","slug":"journalizing-revenue-and-payments-on-account","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/journalizing-revenue-and-payments-on-account\/","title":{"raw":"Journalizing Revenue and Payments on Account","rendered":"Journalizing Revenue and Payments on Account"},"content":{"raw":"
\r\n

Learning outcomes<\/h3>\r\nDemonstrate journal entries for sales and payments on account\r\n\r\n<\/div>\r\nLet\u2019s look at three transactions from NeatNiks:\r\n\r\nOct 15: Received $1,500 cash for services performed.\r\nOct 20: Billed customers $7,250 for work done in October.\r\nOct 30: Collected $1,600 from customers on account.\r\n\r\nAnd at one question:\r\nHow much do customers owe Nick?\r\n\r\nLet\u2019s say on October 10, Nick got a call from Water Works Business Park asking for a one-year commitment to clean the offices for $1,500 a month. On the 15th, Nick showed up and cleaned everything to the owner\u2019s satisfaction. Simple enough.\r\n\r\nNow apply the five-step process:\r\n\r\n\"Two<\/a>\r\n

Step 1: Identify the Contract with a Customer<\/h3>\r\nThis step is trickier than it looks. Is the contract for one year or month-by-month? Legally, the contract may only be enforceable as it is executed because it is not in writing.\r\n

Step 2: Identify the Performance Obligations<\/h3>\r\nCleaning the office is the obligation in order to earn the pay. This isn\u2019t a complicated transaction that needs to be analyzed in depth, but then again, its simplicity makes this analysis a good place to start.\r\n

Step 3: Determine the Transaction Price<\/h3>\r\nIt appears to be $1,500 per cleaning. Verbally, there is an agreement for $18,000, but each obligation under the contract is $1,500. Also, since this is a contract that would take more than one year to complete, and since it is in excess of $500, it has to be in writing to be legally enforceable (if there is a dispute). Each cleaning could be seen as a single contract that arises when Nick shows up to clean. There\u2019s an entire field of law related to what makes a binding contract that is beyond the scope of this course. Regardless, as accountants, we have to know a little bit about everything.\r\n

Step 4: Allocate the Transaction Price to the Performance Obligations<\/h3>\r\nIf the contract was $18,000 for one year of service, and it was in writing, then it would make sense to allocate the entire price to each month of service (in this case).\r\n

Step 5: Recognize Revenue When or As Performance Obligations Are Satisfied<\/h3>\r\nWe then recognize (record) one month of revenue once the service is performed to the customer\u2019s satisfaction.\r\n\r\nQuestion: What if the customer refused to pay because the work was not acceptable?<\/em>\r\n\r\nNow might be a good time to suggest to Nick that he create some kind of written agreement for his customers to clarify expectations. In this kind of situation though, if the customer was not happy with the service but paid anyway, you might want to record the payment not as earned revenue, but as a customer deposit, also known as unearned revenue\u2014a liability. If the customer is happy once the dispute is resolved, we would record a journal entry to move the unearned revenue to earned revenue, or if the company refused to accept the substandard performance on our part, we may have to refund the money. Let\u2019s come back to this scenario later. For now, let\u2019s assume the customer is happy and we\u2019re done.\r\n\r\nAs we saw in a previous section, we would make the following entry:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Journal<\/span><\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nDescription<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 15<\/th>\r\nChecking<\/td>\r\n110<\/td>\r\n1,500.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 15<\/span><\/th>\r\n      Service Revenue<\/td>\r\n410<\/td>\r\n<\/td>\r\n1,500.00<\/td>\r\n<\/tr>\r\n
Oct 15<\/span><\/th>\r\nTo record cash received for services rendered<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nNow, let\u2019s say Nick went to Abe\u2019s Bowling Emporium on the 16th and cleaned up after a birthday party. ABE agreed to pay $1,000. On the 17th, Nick and his helpers cleaned up National City Park after a balloon festival for $2,500. On the 18th, Nick\u2019s crew cleaned a series of vacation rentals for Our Town Properties for $2,000, and on the 19th the team cleaned the Multi-Purpose Athletic Club for $1,750. On the 20th, he sat down and sent bills (invoices) to all these customers.\r\n\r\nAs Nick\u2019s accountant, you make sure all these revenues are \u201cearned\u201d according to GAAP\u2019s five-step process and then you make the following entry:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Journal<\/span><\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nDescription<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 20<\/th>\r\nAccounts Receivable<\/td>\r\n120<\/td>\r\n7,250.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 20<\/span><\/th>\r\n      Service Revenue<\/td>\r\n410<\/td>\r\n<\/td>\r\n7,250.00<\/td>\r\n<\/tr>\r\n
Oct 20<\/span><\/th>\r\nTo record billings for services rendered<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nThe Accounts Receivable ledger now looks like this:\r\n\r\n \r\n \r\n \r\n \r\n \r\n\r\n\r\n \r\n \r\n \r\n
\r\n
General Ledger<\/div>\r\n
Account: Accounts Receivable<\/span>Account No. 120<\/span><\/div>\r\n <\/caption>\r\n
 <\/td>\r\n <\/tr>\r\n
Date<\/th>\r\n Item<\/th>\r\n Post. Ref.<\/th>\r\n Debit<\/th>\r\n Credit<\/th>\r\n Balance<\/th>\r\n <\/tr>\r\n
Debit<\/th>\r\n Credit<\/th>\r\n <\/tr>\r\n <\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct<\/th>\r\n 1<\/th>\r\n Opening Bal.<\/em><\/th>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n0.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct<\/span><\/th>\r\n20<\/td>\r\n<\/td>\r\nGJ1<\/td>\r\n7,250.00<\/td>\r\n<\/td>\r\n7,250.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n <\/tbody>\r\n
 <\/td>\r\n <\/tr>\r\n <\/tbody>\r\n<\/table>\r\n\r\nUnfortunately, this ledger is just a control account and doesn\u2019t tell you who owes you what. That\u2019s why you keep a subsidiary ledger that looks like this:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\r\n
Subsidiary Ledger<\/div>\r\n
Account: Accounts Receivable<\/span>Account No. 120<\/span><\/div>\r\n<\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nItem<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\nBalance<\/th>\r\n<\/tr>\r\n
Debit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nABE<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1016<\/td>\r\n<\/td>\r\n1,000.00<\/td>\r\n<\/td>\r\n1,000.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nMPAC<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1019<\/td>\r\n<\/td>\r\n1,750.00<\/td>\r\n<\/td>\r\n1,750.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nNational City<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1017<\/td>\r\n<\/td>\r\n2,500.00<\/td>\r\n<\/td>\r\n2,500.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nOur Town Properties<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1018<\/td>\r\n<\/td>\r\n2,000.00<\/td>\r\n<\/td>\r\n2,000.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nTotal<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n7,250.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nOn October 30, Nick received one or more checks from clients and made this entry:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Journal<\/span><\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nDescription<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 30<\/th>\r\nChecking<\/td>\r\n110<\/td>\r\n1,600.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 30<\/span><\/th>\r\n      Accounts Receivable<\/td>\r\n120<\/td>\r\n<\/td>\r\n1,600.00<\/td>\r\n<\/tr>\r\n
Oct 30<\/span><\/th>\r\nTo record receipt of payments from customers on account<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nAnd the general ledger for Accounts Receivable showed this:\r\n\r\n \r\n \r\n \r\n \r\n \r\n\r\n\r\n\r\n \r\n \r\n \r\n \r\n
\r\n
General Ledger<\/div>\r\n
Account: Accounts Receivable<\/span>Account No. 120<\/span><\/div>\r\n <\/caption>\r\n
 <\/td>\r\n <\/tr>\r\n
Date<\/th>\r\n Item<\/th>\r\n Post. Ref.<\/th>\r\n Debit<\/th>\r\n Credit<\/th>\r\n Balance<\/th>\r\n <\/tr>\r\n
Debit<\/th>\r\n Credit<\/th>\r\n <\/tr>\r\n <\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct<\/th>\r\n 1<\/th>\r\n Balance<\/em><\/th>\r\na<\/td>\r\n<\/td>\r\n<\/td>\r\n0.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct<\/span><\/th>\r\n20<\/td>\r\n<\/td>\r\nGJ1<\/td>\r\n7,250.00<\/td>\r\n<\/td>\r\n7,250.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct<\/span><\/th>\r\n30<\/td>\r\n<\/td>\r\nGJ2<\/td>\r\n<\/td>\r\n1,600.00<\/td>\r\n5,650.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n <\/tbody>\r\n
 <\/td>\r\n <\/tr>\r\n <\/tbody>\r\n<\/table>\r\n\r\nNow you, as the accountant, in addition to updating (posting the journal entry) to the general ledger (the GL) account (control), post the same entry to the subsidiary ledger. Let\u2019s assume the $1,600 was from several clients ($1,000 from ABE and $600 from National City) and was entered as one deposit on the 30th.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\r\n
Subsidiary Ledger<\/div>\r\n
Account: Accounts Receivable<\/span>Account No. 120<\/span><\/div>\r\n<\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nItem<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\nBalance<\/th>\r\n<\/tr>\r\n
Debit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nABE<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1016<\/td>\r\n<\/td>\r\n1,000.00<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/span><\/th>\r\n30<\/th>\r\npayment on account<\/td>\r\n<\/td>\r\n<\/td>\r\n1,000.00<\/td>\r\n0.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nMPAC<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1019<\/td>\r\n<\/td>\r\n1,750.00<\/td>\r\n<\/td>\r\n1,750.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nNational City<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1017<\/td>\r\n<\/td>\r\n2,500.00<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\nOct.<\/span><\/th>\r\n30<\/th>\r\npayment on account<\/td>\r\n<\/td>\r\n<\/td>\r\n600.00<\/td>\r\n1,900.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nOur Town Properties<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct.<\/th>\r\n20<\/th>\r\ncleaning inv. NN1018<\/td>\r\n<\/td>\r\n2,000.00<\/td>\r\n<\/td>\r\n2,000.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\nTotal<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n5,650.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nNow you can answer this question: How much do customers owe Nick?\r\n\r\nIn fact, you can answer that question in detail. If you were being audited, the independent reviewer would send \u201cblind\u201d confirmation letters to the customers asking what their records show they owe you. Hopefully, their records would match yours.\r\n\r\nhttps:\/\/youtu.be\/_U5ZyGibqKQ\r\n\r\nLet\u2019s return for one moment to the idea of unearned revenue.\r\n\r\nIf Water Works Business Park paid in advance or did not accept the work Nick did as completing the contract (the agreement), instead of this entry:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Journal<\/span><\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nDescription<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 15<\/th>\r\nChecking<\/td>\r\n110<\/td>\r\n1,500.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 15<\/span><\/th>\r\n      Service Revenue<\/td>\r\n410<\/td>\r\n<\/td>\r\n1,500.00<\/td>\r\n<\/tr>\r\n
Oct 15<\/span><\/th>\r\nTo record cash received for services rendered<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nYou would make this entry:\r\n\r\nAs we saw in a previous section, we would make the following entry:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Journal<\/span><\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nDescription<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 15<\/th>\r\nChecking<\/td>\r\n110<\/td>\r\n1,500.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Oct 15<\/span><\/th>\r\n      Unearned Revenue<\/td>\r\n325<\/td>\r\n<\/td>\r\n1,500.00<\/td>\r\n<\/tr>\r\n
Oct 15<\/span><\/th>\r\nTo record cash received for services rendered<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nUnearned revenue is a liability. Nick has collected the cash but it\u2019s not his\u2014he hasn\u2019t earned it. We\u2019re back to that seemingly simple cornerstone of accrual basis accounting: recognize revenue as it is earned.\r\n\r\nOnce the service obligation (in this case, the cleaning) is fulfilled, let\u2019s say in November, you would make this adjusting journal entry, moving the revenue from unearned (a liability) to earned (revenue\/equity):\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Journal<\/span><\/caption>\r\n
<\/td>\r\n<\/tr>\r\n
Date<\/th>\r\nDescription<\/th>\r\nPost. Ref.<\/th>\r\nDebit<\/th>\r\nCredit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
20--<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Nov 30<\/th>\r\nUnearned Revenue<\/td>\r\n325<\/td>\r\n1,500.00<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Nov 30<\/span><\/th>\r\n      Service Revenue<\/td>\r\n410<\/td>\r\n<\/td>\r\n1,500.00<\/td>\r\n<\/tr>\r\n
Nov 30<\/span><\/th>\r\nTo record cash received for services rendered<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n\r\nNext, we\u2019ll take a closer look at different kinds of receivables.\r\n
\r\n

practice question<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23736\r\n\r\n<\/div>","rendered":"
\n

Learning outcomes<\/h3>\n

Demonstrate journal entries for sales and payments on account<\/p>\n<\/div>\n

Let\u2019s look at three transactions from NeatNiks:<\/p>\n

Oct 15: Received $1,500 cash for services performed.
\nOct 20: Billed customers $7,250 for work done in October.
\nOct 30: Collected $1,600 from customers on account.<\/p>\n

And at one question:
\nHow much do customers owe Nick?<\/p>\n

Let\u2019s say on October 10, Nick got a call from Water Works Business Park asking for a one-year commitment to clean the offices for $1,500 a month. On the 15th, Nick showed up and cleaned everything to the owner\u2019s satisfaction. Simple enough.<\/p>\n

Now apply the five-step process:<\/p>\n

\"Two<\/a><\/p>\n

Step 1: Identify the Contract with a Customer<\/h3>\n

This step is trickier than it looks. Is the contract for one year or month-by-month? Legally, the contract may only be enforceable as it is executed because it is not in writing.<\/p>\n

Step 2: Identify the Performance Obligations<\/h3>\n

Cleaning the office is the obligation in order to earn the pay. This isn\u2019t a complicated transaction that needs to be analyzed in depth, but then again, its simplicity makes this analysis a good place to start.<\/p>\n

Step 3: Determine the Transaction Price<\/h3>\n

It appears to be $1,500 per cleaning. Verbally, there is an agreement for $18,000, but each obligation under the contract is $1,500. Also, since this is a contract that would take more than one year to complete, and since it is in excess of $500, it has to be in writing to be legally enforceable (if there is a dispute). Each cleaning could be seen as a single contract that arises when Nick shows up to clean. There\u2019s an entire field of law related to what makes a binding contract that is beyond the scope of this course. Regardless, as accountants, we have to know a little bit about everything.<\/p>\n

Step 4: Allocate the Transaction Price to the Performance Obligations<\/h3>\n

If the contract was $18,000 for one year of service, and it was in writing, then it would make sense to allocate the entire price to each month of service (in this case).<\/p>\n

Step 5: Recognize Revenue When or As Performance Obligations Are Satisfied<\/h3>\n

We then recognize (record) one month of revenue once the service is performed to the customer\u2019s satisfaction.<\/p>\n

Question: What if the customer refused to pay because the work was not acceptable?<\/em><\/p>\n

Now might be a good time to suggest to Nick that he create some kind of written agreement for his customers to clarify expectations. In this kind of situation though, if the customer was not happy with the service but paid anyway, you might want to record the payment not as earned revenue, but as a customer deposit, also known as unearned revenue\u2014a liability. If the customer is happy once the dispute is resolved, we would record a journal entry to move the unearned revenue to earned revenue, or if the company refused to accept the substandard performance on our part, we may have to refund the money. Let\u2019s come back to this scenario later. For now, let\u2019s assume the customer is happy and we\u2019re done.<\/p>\n

As we saw in a previous section, we would make the following entry:<\/p>\n\n\n\n\n\n\n\n\n\n
Journal<\/span><\/caption>\n
<\/td>\n<\/tr>\n
Date<\/th>\nDescription<\/th>\nPost. Ref.<\/th>\nDebit<\/th>\nCredit<\/th>\n<\/tr>\n<\/thead>\n
20–<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct 15<\/th>\nChecking<\/td>\n110<\/td>\n1,500.00<\/td>\n<\/td>\n<\/tr>\n
Oct 15<\/span><\/th>\n      Service Revenue<\/td>\n410<\/td>\n<\/td>\n1,500.00<\/td>\n<\/tr>\n
Oct 15<\/span><\/th>\nTo record cash received for services rendered<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Now, let\u2019s say Nick went to Abe\u2019s Bowling Emporium on the 16th and cleaned up after a birthday party. ABE agreed to pay $1,000. On the 17th, Nick and his helpers cleaned up National City Park after a balloon festival for $2,500. On the 18th, Nick\u2019s crew cleaned a series of vacation rentals for Our Town Properties for $2,000, and on the 19th the team cleaned the Multi-Purpose Athletic Club for $1,750. On the 20th, he sat down and sent bills (invoices) to all these customers.<\/p>\n

As Nick\u2019s accountant, you make sure all these revenues are \u201cearned\u201d according to GAAP\u2019s five-step process and then you make the following entry:<\/p>\n\n\n\n\n\n\n\n\n\n
Journal<\/span><\/caption>\n
<\/td>\n<\/tr>\n
Date<\/th>\nDescription<\/th>\nPost. Ref.<\/th>\nDebit<\/th>\nCredit<\/th>\n<\/tr>\n<\/thead>\n
20–<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct 20<\/th>\nAccounts Receivable<\/td>\n120<\/td>\n7,250.00<\/td>\n<\/td>\n<\/tr>\n
Oct 20<\/span><\/th>\n      Service Revenue<\/td>\n410<\/td>\n<\/td>\n7,250.00<\/td>\n<\/tr>\n
Oct 20<\/span><\/th>\nTo record billings for services rendered<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The Accounts Receivable ledger now looks like this:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
\n <\/caption>\n
 <\/td>\n<\/tr>\n
Date<\/th>\nItem<\/th>\nPost. Ref.<\/th>\nDebit<\/th>\nCredit<\/th>\nBalance<\/th>\n<\/tr>\n
Debit<\/th>\nCredit<\/th>\n<\/tr>\n<\/thead>\n
20–<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct<\/th>\n1<\/th>\nOpening Bal.<\/em><\/th>\n<\/td>\n<\/td>\n<\/td>\n0.00<\/td>\n<\/td>\n<\/tr>\n
Oct<\/span><\/th>\n20<\/td>\n<\/td>\nGJ1<\/td>\n7,250.00<\/td>\n<\/td>\n7,250.00<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n
 <\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Unfortunately, this ledger is just a control account and doesn\u2019t tell you who owes you what. That\u2019s why you keep a subsidiary ledger that looks like this:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n<\/caption>\n
<\/td>\n<\/tr>\n
Date<\/th>\nItem<\/th>\nPost. Ref.<\/th>\nDebit<\/th>\nCredit<\/th>\nBalance<\/th>\n<\/tr>\n
Debit<\/th>\nCredit<\/th>\n<\/tr>\n<\/thead>\n
20–<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nABE<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1016<\/td>\n<\/td>\n1,000.00<\/td>\n<\/td>\n1,000.00<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nMPAC<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1019<\/td>\n<\/td>\n1,750.00<\/td>\n<\/td>\n1,750.00<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nNational City<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1017<\/td>\n<\/td>\n2,500.00<\/td>\n<\/td>\n2,500.00<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nOur Town Properties<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1018<\/td>\n<\/td>\n2,000.00<\/td>\n<\/td>\n2,000.00<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nTotal<\/td>\n<\/td>\n<\/td>\n<\/td>\n7,250.00<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

On October 30, Nick received one or more checks from clients and made this entry:<\/p>\n\n\n\n\n\n\n\n\n\n
Journal<\/span><\/caption>\n
<\/td>\n<\/tr>\n
Date<\/th>\nDescription<\/th>\nPost. Ref.<\/th>\nDebit<\/th>\nCredit<\/th>\n<\/tr>\n<\/thead>\n
20–<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct 30<\/th>\nChecking<\/td>\n110<\/td>\n1,600.00<\/td>\n<\/td>\n<\/tr>\n
Oct 30<\/span><\/th>\n      Accounts Receivable<\/td>\n120<\/td>\n<\/td>\n1,600.00<\/td>\n<\/tr>\n
Oct 30<\/span><\/th>\nTo record receipt of payments from customers on account<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

And the general ledger for Accounts Receivable showed this:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n
\n <\/caption>\n
 <\/td>\n<\/tr>\n
Date<\/th>\nItem<\/th>\nPost. Ref.<\/th>\nDebit<\/th>\nCredit<\/th>\nBalance<\/th>\n<\/tr>\n
Debit<\/th>\nCredit<\/th>\n<\/tr>\n<\/thead>\n
20–<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct<\/th>\n1<\/th>\nBalance<\/em><\/th>\na<\/td>\n<\/td>\n<\/td>\n0.00<\/td>\n<\/td>\n<\/tr>\n
Oct<\/span><\/th>\n20<\/td>\n<\/td>\nGJ1<\/td>\n7,250.00<\/td>\n<\/td>\n7,250.00<\/td>\n<\/td>\n<\/tr>\n
Oct<\/span><\/th>\n30<\/td>\n<\/td>\nGJ2<\/td>\n<\/td>\n1,600.00<\/td>\n5,650.00<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n
 <\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Now you, as the accountant, in addition to updating (posting the journal entry) to the general ledger (the GL) account (control), post the same entry to the subsidiary ledger. Let\u2019s assume the $1,600 was from several clients ($1,000 from ABE and $600 from National City) and was entered as one deposit on the 30th.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n<\/caption>\n
<\/td>\n<\/tr>\n
Date<\/th>\nItem<\/th>\nPost. Ref.<\/th>\nDebit<\/th>\nCredit<\/th>\nBalance<\/th>\n<\/tr>\n
Debit<\/th>\nCredit<\/th>\n<\/tr>\n<\/thead>\n
20–<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nABE<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1016<\/td>\n<\/td>\n1,000.00<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/span><\/th>\n30<\/th>\npayment on account<\/td>\n<\/td>\n<\/td>\n1,000.00<\/td>\n0.00<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nMPAC<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1019<\/td>\n<\/td>\n1,750.00<\/td>\n<\/td>\n1,750.00<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nNational City<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1017<\/td>\n<\/td>\n2,500.00<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n<\/tbody>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nOur Town Properties<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Oct.<\/th>\n20<\/th>\ncleaning inv. NN1018<\/td>\n<\/td>\n2,000.00<\/td>\n<\/td>\n2,000.00<\/td>\n<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
<\/td>\n<\/td>\nTotal<\/td>\n<\/td>\n<\/td>\n<\/td>\n5,650.00<\/td>\n<\/td>\n<\/tr>\n<\/table>\n

Now you can answer this question: How much do customers owe Nick?<\/p>\n

In fact, you can answer that question in detail. If you were being audited, the independent reviewer would send \u201cblind\u201d confirmation letters to the customers asking what their records show they owe you. Hopefully, their records would match yours.<\/p>\n