Under IRS rules, you are allowed to earn your subscription income over the lifetime of your subscriptions. For example, if at the end of fiscal year, you had one subscriber with 6 remaining issues who had paid $12 for his subscription, then you would still owe 6 remaining issues times $1 per issue, or $6 in unearned/deferred income. Another way to look at unearned/deferred, is the amount you would owe if you shut down your publication today and had to prorate refund every subscriber? That’s basically what deferred ( or unearned) income is. The key to remember is that the act of publishing an issue is what earns the revenue and decreases your liability.
Type of Accounting Methods
Publishers use two types of accounting methods for deferred accounting called the “Earned Method” and the “Deferred Method”. First Edition supplies you with both earned/deferred amounts of your publication as part of the update reports in FeCirc.Exe. The earned portion reported, is the amount earned for that one single issue, while Deferred is all the outstanding unearned income.
First Edition uses this simple formula for calculating Earned income
Subscription Price / subscription term, which is simple the price of one single issue. Deferred income is calculated by Remaining Issues times (subscription price/subscription term), which is the price per issue time the remaining issues to fulfill. That’s pretty simple, but gets more complicated with advance renewals. Consider a subscriber with 2 remaining issue who paid $24 who renews for an addition 12 issues @ $36. What is his deferred income? Its price/term (24/12) times 2 remaining issue+ the full $36 of the renewing subscription. So First Edition takes all of that into account.
What method do we recommend? Most publishers use the “Deferred Method”. And if you’re a small publisher, you might choose this method because you wish to update your General Ledger once a year at year end. Others will choose a monthly or quarterly period. The deferred method is a very simple General Journal entry. You start off by reversing the previous entries. Thus if you had $100,000 balance in your deferred income account you would:
Deferred Income 100,000.00
Subscription Income 100,000.00
This zeros out deferred income and adds the balance to income.
Then if the next period’s deferred income was, for example, $125,000, then you would enter:
Subscription Income $125,000.00
Deferred Income $125,000.00.
New period adjustment.
This reduces income by a $125,000 and records the $125,000 deferred income in the deferrened income account. Thus you subscription income would first go up $100,000 from the first entry, and then down $125,000 on the second entry. Debits decrease income, and credits increase income.
“Earned” Method of Accounting
The “Earned method” works differently. Typically, the beginning subscription income is posted directly to the Deferred income account. Then each update’s earned income is posted this way:
Deferred Income 10,123.00
Subscription Income 10,123.00
Adjust October deferred.
Here an 3 issue example of a six month subscription that paid $24 using the two methods. And then year-end occurs right after issue 3. The below example assumes the publisher using the “Deferred Method” only adjust income once at the end of the year. It could, however, be done with each issue also. So with the Deferred Method you can be a little lazy if you wish.
--------------------------Earned Method ----------- ------------- Deferred Method------
Income Deferred Income Deferred
Day 1 0 24.00 24.00 0.00
Issue 1 4.00 20.00
Issue 2 8.00 16.00
Issue 3 12.00 12.00 (12.00) 12.00
For the earned method, the sale was posted directly to Deferred Income. And then the price per issue of $4 ($24 price/6 issues) of earned income is posted (credited) to income account and deducted (debited) from the deferred account.
However, for the deferred method example above, the subscription price was posted directly to the subscription income account. And, this publisher opted to wait until year-end (Issue 3 was the last issue of the year) and then post the $12.00 Deferred in the First Edition to report. In this case he posted (credit) it to deferred and deducted it (debit) from the subscription income account. The publisher only needed the last First Edition deferred income report to pick up the $12 of deferred income. Pretty simple.
Of course you may wish to post every month, in fact you may have no choice, especially if your company is a public company. However, the deferred income method work here also since deferred income takes into account all the changes such as back starts or bad pays.
You must keep in mind, however, that deferred income or earned income is not an accounting entry of a real life transaction per se. It’s really just a calculated figure. And many times the calculations are not to the even penny. For example, an $11 subscription with a term of 12 issues has a $.916666666 per issue price. First Edition calculates earned and deferred, subscriber by subscriber, and then only rounds the final total figure to the nearest penny to avoid big rounding errors.
First Edition Statuses for Deferring
What subscription statuses does First Edition use in Deferred calculations? It uses the statues: AVPFS and O. Active, Vacation Suspend, Postal Suspend, Future Start, Credit Suspend, and Occasional/Rotate. Said in another way, only Active and suspended accounts are used in calculating deferred.
Credit Suspends may become a bad debt or might be paid up. One on the problems in reporting with the “Earned Income Method” is that it can change due to bad debt, refunds, NSF checks, changes to the price/term, and so forth. These primarily reduce earned income for previous issues. However changes like back starts can actually increase earned income for prior issue. First Edition also lists these changes to Earned income with each report.
Premiums and Postage
What about premiums or postage. Well, if they’re included with the subscription price then they’re automatically used in the calculations. However, if you put postage or premium amounts into the add-on field of a subscription and want this amount counted in deferred, then visit Setup, Preferences, Accounting, and check Include Add-on in Deferred.
And then what about credit subscriptions? Normally they are included. Accrued accounting calls for matching revenues over the life time of the subscription, and has nothing to do with when the subscription paid (assuming its eventually paid). However, due to the many requests, we added the option in Setup, Preferences, Account as “Do Not Defer Credit Subscribers.”
Deferred Income is a liability account. So on your books, it looks like we you owe a large debt. However, most publishers don’t feel that deferred is a real obligation, but just a contingent one. However, good luck when you try to explain this to your banker.