According to SFAC5, "Recognition and Measurement in Financial
Statements of Business Enterprises," revenue cannot be recognized
until the earnings process is complete and the firm is reasonably
assured of payment. You easily satisfy the second condition by
receiving cash up front for the subscription. However, until you
provide the actual products, you cannot properly recognize revenue. I
found one reference to an exception if the subscription is only a
minimal source of revenue compared to advertising. However, you would
still need to defer recognizing the advertising revenue until the
magazine is actually produced.
You pay more taxes by recognizing revenue early, in addition to
improperly accounting for it, so I would suggest deferring all
subscription revenue and recognizing it only when you deliver products
to your customers.
The concept of materiality is limited to what you can get your
auditors to accept as being sufficiently minor to allow them to
certify your financial statements as being materially complete, valid
and accurate. It does not change the fact that the item is a
misstatement. Therefore, while booking a small number of small
subscriptions improperly may survive an audit, it is still improper
from an accounting perspective.
An example of how the accounting works: "...[Y]our company sells
magazine subscriptions. Subscribers pay cash in advance of receiving
their monthly magazine. As you (the company) receive the cash you
defer the revenue recognition. At that point it is a liability. Let's
assume you receive $ 4,800 in cash for forty eight months of
magazines. Debit cash $ 4,800 and credit unearned fees income $ 4,800.
As you issue the magazines, you are entitled to recognize the revenue.
Therefore, debit unearned fees income and credit fees income."
"Adjusting Entries" http://www.personal.psu.edu/faculty/m/j/mjd10/Dailey/inst_8.doc
Sincerely,
Wonko
Sources:
"Income Measurement and Accrual Accounting" by S. Das
http://www.uic.edu/classes/mba/mba501/Lec_Notes/Lect_4.doc
"Revenue Recognition" by Joshua Kennon, About.com (2005)
http://beginnersinvest.about.com/od/gaap/a/aa0605.htm?rd=1
"Adjusting Entries" http://www.personal.psu.edu/faculty/m/j/mjd10/Dailey/inst_8.doc
"Form 10-Q" Ziff Davis Holdings, Inc. (September 30, 2005)
http://www.ziffdavis.com/pdf/investor/Y13358_10Q.pdf
"Reporting materiality" Australian Educational Research Pty Ltd
http://www.abrema.net/abrema/materiality_g.html
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