How should we be recognising revenue for subscription based
businesses, for example, the income in advance/liability issue?  We
provide services in New Zealand and Australia and at the moment, we
book one
twelth of the revenue in the month the sale is made (they are 12 month
subscriptions)and the balance is then spread over the following 11
months until renewal when it starts again.  The advance income shows
in a liability account and reduces as each month passes or where the
income is "earned".  We believe we are stating this correctly however
as our business grows, so does the liability, and I am really
wondering just when our
business will turn the corner so to speak.

As an alternative to the above method, could/should we be reporting
actual income made in the month of the sale (in full), and then moving
it all to the liability account which reduces over the 12 month
period.

The accounting standards for New Zealand and Australia should be used
where possible, if not, the UK should suffice, not sure about the US.

Generally speaking, you should book income "as it is earned,"
regardless of when it is paid.

It seems to me you are booking your revenue correctly, if I understand
you right.  Let's say $1,200 is paid in advance for one year.

The entry would be:

DEBIT Cash $1200
  CREDIT Deferred Revenue (Liability) $1200

Then, each month, you amortize 1/12 of your Deferred Revenue and
recognize it as revenue for the month.

DEBIT Deferred Revenue $100
  CREDIT Revenue (or Sales) $100

That's how we would book it in the U.S.  Hope this information helps a
little.

What respree wrote is correct, and for what I can see that's the way
you are already recognizing your revenue. We do it the same way in the
U.S.

There are two methods of accounting used in the U.S. One is the
accrual (which you are properly using) and the other is the cash
method (which I think has to do with the alternative method you are
considering).

The cash method allows you to recognize all of your revenue at the
moment cash is received by you. Not as it's 'earned'.

The two major disadvantages of cash accouting are 1) it will skew your
income and the apparent performance of your company because you could
sell a lot of subscriptions in one month and then have a couple of dry
months. You will see wild peaks and valleys during the year in your
income statement as a result.

2) In the U.S. the cash method of accounting will make you pay taxes
at the moment you receive cash, instead of as you 'earn it'. Therefore
accrual is sometimes a more advantageous choice from a tax
perspective.

Most large sophisticated business run on accrual. You'll find that
cash basis is used mostly by sole propietorships and small businesses.

Now I'm a little confused about the 'alternative' method you explain
above. Is this what you are proposing?:

To record sale: "could/should we be reporting 
actual income made in the month of the sale (in full):"
DEBIT Cash $1200
    CREDIT Revenue (or Sales) $1200

To "then moving
it all to the liability account":
DEBIT Revenue (or Sales) $1200
    CREDIT Deferred Revenue (Liability) $1200 


And then "which reduces over the 12 month 
period"
DEBIT Deferred Revenue $100 
  CREDIT Revenue (or Sales) $100

I don't know what you would be accomplishing by this. If you look at
entries #1 and 2, the Debit and Credits to Revenue for $1,200 pretty
much cancel each other, so in the end you end up with the same
transaction that respree-ga has below...

I'll say, stick with what you are doing. It's the right way of doing
it, even as your business grows.

Hope that helps

Hi raidx:

No, actually entries #1 and #2 don't cancel each other out.  Entry #1
is a liability account, and entry #2 is a revenue account.

As you receive cash, put it all on the balance sheet.  Then amortize a
percentage on a straight line basis over which the cash received
benefits (in this example, one year).

One the cash method is an acceptable method according to GAAP
(Generally Accepted Accounting Principles), it presents a distorted
view of the world for either a big or small company.  As you said, the
peaks and valleys.  I would not recommend using this method for a
company large or small.

In short, I agree, stick to what you're doing.

respree,

Actually what I meant by cancelling out was that if you take entry #1
and #2 in my example and remove the Dr and Cr to the Revenue account,
then we end up with entry #1 in your example so there's no reason to
do the additional work Brownienz is suggesting :)

raidx:

Sorry, I thought you were talking to me, not raidx.

Of course, you are right. brownienz's 'alternative' treatment, while
it comes out to the right answer, creates an unnecessary entry.

My policy - Least amount of entries is best (with proper audit trail,
of course).

sorry, that should have read "...talking to me, not brownienz"