What does non-billable service mean

Business-Extreme.com

Service companies that use the accrual accounting method must periodically post income from services not provided. Unearned revenue, also known as latent revenue, is created when a customer pays upfront for services. Since you have not yet completed the required work, there are no items of expenditure that can be matched against sales. Before sales can be recorded, they must be reported as a liability in the company's general ledger.

identification

If a customer pays you for services before you receive them, you must post the payment as unrealized revenue. For example, you can offer a discount to customers who have prepaid for a period of time. Revenue not earned is not limited to service companies, although it is more common in industries that regularly run long-term contracts. Any unearned service revenue is a liability as the company now owes customer service for the amount paid. The payment still benefits the company as it has cash to grow the business or invest in dividends and interest. Cash flow is vital to the health of your business, especially if you are just starting out.

Types

There are several practical examples of unearned service revenue, such as: B. Magazine subscriptions, meat delivery services, property management contracts, and construction jobs. Other examples of deferred income include airline or bus tickets sold prior to the travel date, consulting contracts, and health club memberships. Prepaid insurance premiums and holders for accounting, legal, and other professional services can also result in unrealized income.

Initial accounting

Create a new liability account in your general ledger software labeled "Unearned" or "Accrued" sales. Direct debit in cash for the customer's prepayment. Have you credited the full payment amount to the new liability account if no services have yet been performed for the customer. Recognizing unrealized income as a liability prevents the company from oversubscribing its position by listing cash equal to the value of the services owed to customers.

Revenue recognition

Unearned income will not affect the company's income statement until the services are provided and the income may be recognized. After you have made services available to the customer, you have to convert a proportionate amount of the sales not yet achieved from the current sales. The revenue share generated may be based on the time that has passed on the contract or actual usage by the customer. For example, if your customer has 10 hours of IT repair work on a contract for $ 1,500 per year and the customer takes two hours in the current month, you would be charged $ 300 for unrealized revenue and a corresponding credit for ongoing revenue.