There are types of services which require that you make a one-off advance payment for a longer period. Essentially what happens is that you’re charged a fee that grants you access to services for a specific term, like a year for say. Whether it’s financially wise to pay up a bigger amount one-off is one thing, but the accounting for such expenses is pretty strict. By nature expenses should be recognized within the period the benefits are received. As such, these payments should be yes done at the time the invoice has its due date, however the recognition on the financial statements is somewhat longer time wise.

Once you receive the invoice, your initial entry is as follows:

Db: Prepaid expenses
Cr: Payables to suppliers
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When you’re purely in the field of selling services rather than goods, you clearly don’t have physical inventory, but you still sell something. That something is effectively time and what’s being done within the time. Of course to some extent it’s also materials used in the process, but they are marginal to the situation. So, as such your expenses are mostly employee related, but also services bought from third parties that are supportive to the end service you’re providing.

Now whilst with the employee related expenses the accounting is simple – they are charged to expenses when the employee has done his or her job – normally as a monthly wage, with services bought however the accounting is a bit more tricky. Let’s say that you’re providing commercial campaigns (i.e., TV commercials, etc.) for big companies and for that you sometimes need to buy preparation work (i.e., the TV commercial material) that’s going to be launched at a later date. Just to make sure you’re going to meet all deadlines, you’ve already asked the supplier to prepare the video. Now that you receive the video, you also receive an invoice for it. The accounting entry for this transaction is as follows:
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When your company is dealing with goods, as in purchasing and selling them, something you will have in your accounts is the inventory. Now whilst one thing is their physical safety and keeping, the other thing is the accounting that’s surrounding them.

Goods, when bought, are recognized on your balance sheet when the risks and rewards have been transferred and as such, are recognized at cost. The accounting entries for inventory related transactions are as follows:
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You have made the sale and since your customer didn’t pay in cash at the spot of making the sale, you did recognize a receivable against the customer on your balance sheet. All is fine and good and now the date for the real payment arrives. Your customer is a decent company and it’s going to pay up its debt in due time. As such, the accountant over there is making a bank transfer to send the money to your account. The moment you can actually see the transfer is when it arrives to your account, however.

So you open your bank statement for the period (i.e., day, week or a month) and notice that the payment has arrived. The accounting entry for this should be as follows:
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One thing is the selling process, like agreeing over the goods, their price and related conditions, but the other part of the sale and something we’re focusing on, is the accounting treatment of a relevant sales transaction. At the end of the day companies are making sales to earn profits, so accounting for the sale is equally important to ensure the sale is in fact helping to make profits in the accounts. Now, in a regular and most common situations the treatment itself is fairly same.

When the agreement has been reached, the seller usually either ships the goods or renders a service, whichever the case may be, and accounts for the sale. Accounting for the sale is done as follows:
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We have just received a phone bill for 150 at the start of the month. Usually they are not paid right away, but on the due date of the payment.

Accounting Entries

So first we have to “register” the phone bill. We are going to add 150 to expenses and accounts payable.

Now when you have paid for the phone bill, you have given money for it, you decrease accounts payable and cash for 150.

Reporting

When you receive a phone bill and you haven’t paid for it then you should add that under Current liabilities. In our example we are adding 150 under Current liabilities – Trade and other payables.
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We are going to show what entries you need to do when you have just bought yourself some office supplies for 100. As office supplies are usually used for the less than a year and they aren’t separately all that expensive, there is no point in depreciating them and they are written right away into expenses.

Accounting Entries

When buying supplies like this we need to increase Office expenses and decrease Cash by 100.

Reporting

We are going to assume that you had Cash of 2,000 in balance sheet before buying office supplies.

First in balance sheet we are going to decrease 100 from Current Assets – Cash and cash equivalents, resulting in Cash balance of 1,900.
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