Originally Posted by cipher
Exactly. Accrual accounting is very common. In this case it could be accrued revenue and is perfectly fine to record it as such.
Accrual basis accounting is the most common method of accounting for corporations. In accrual basis accounting, revenues are recognized when earned and expenses when incurred. An expense is defined as a cost incurred in the production of revenue. Callaway "earned" the revenue when they delivered product to Watts, so on their income statement, they would have revenue equalling the amount of sales for the year, and a cost of goods sold section representing the cost of those goods (materials, labor, overhead). The entry to record the sale itself would be an increase to sales(income statement) and an increase to accounts receivable (balance sheet). The cash flow statement is separate from either of these, but in a corporation on accrual basis accounting, the income statement, not the cash flow statement is the basis for income taxes. Bad debt expense is a legitimate expense on the income statement but further down, but does effect net income and therefore taxes. It would go to EBITDA of course, and would reduce income and therefore taxes in the year recognized.
Most likely, Callaway would have a policy regarding the aging and valuation of accounts receivable, and that would determine when they recognized bad debt. For instance, they might reserve 50% of all accounts over 90 days and 100% of all accounts over 360 days. The expense to bad debt would automatically be taken at those points in time, regardless of who the receivable was with. If the amounts are later collected, they would come back to revenue as recovery of bad debt, or more specifically as a reduction of bad debt expense in the year recovered, but the effect to the bottom line is the same. It is also possible that their accountants/auditors would make an additional reserve and expense at the end of the year for a specifically doubtful account, and again if later recovered it would come back in as recovery of bad debt.
Most individuals employed by someone else are cash basis taxpayers. I get a paycheck from my employer, and a W-2 at the end of the year that shows how much I received from that employer. If I get a check on January 1, 2014, that income goes in 2014 even though I earned it in 2013. Likewise, anything I pay in 2013, is deducted in 2013, even if I paid it early. If i paid a house note on Dec 15, 2013, that is due Jan 1, 2014, I will receive a form from my bank that says the interest portion was paid in 2013, and will deduct it on my 2013 Taxes.
Erik, in your example, I don't know why you paid taxes on the fees received in advance without knowing how your business is structured--I don't do advising and I am not trying to be nosy or anything--just using it as an example in this discussion. Many self employed individuals and some sub-S corps and LLC's are cash basis, so money is considered earned when received regardless of when the services are rendered. The upside is the next year you won't recognize that income, but would recognize anything you pay with providing the services.