Question

Bikram Yoga Natick pays taxes on a cash basis so annual membership fees received during the year are included in determining their Taxable Income. However, for financial reporting purposes, they are only treated as revenue as time passes and the memberships are expiring. This creates a timing difference which causes Taxable Income to be greater than Income Before Taxes in years when the Deferred Revenue increases. In 2012 the Deferred Revenue account went down, meaning that Taxable Income was less than Income Before Taxes.

What was the entry in 2012 to record this difference?

Answer 1

The entry to record the decrease in Deferred Revenue at Bikram Yoga Natick in 2012 involves debiting the Deferred Revenue liability account and crediting the Revenue account. This reflects the services being provided and the revenue recognition principle, balancing one's financial statements and tax reporting.

Step-by-step explanation:

Recording Deferred Revenue Decrease for Tax Purposes

The question concerns the difference in accounting methods for tax purposes and financial reporting. While Bikram Yoga Natick recognizes annual membership fees as revenue when received for tax purposes, for financial statements, it records these as revenue over the duration of the memberships. This practice creates a timing difference which can cause discrepancies between Taxable Income and Income Before Taxes.

In 2012, when the Deferred Revenue account decreased, indicating that more revenue has been earned than the cash received, the Taxable Income was lower than the Income Before Taxes. The accounting entry to record this would involve decreasing the Deferred Revenue liability account and increasing the Revenue account in the financial statements. This offsetting effect reduces the liability and properly matches the revenue to the corresponding period.

The actual journal entry for the difference would be:

• Debit Deferred Revenue
• Credit Revenue

This reflects that the services related to the membership fees have now been provided, fulfilling the revenue recognition principle, which states that revenue should be recognized in the period it is earned.

The concluding point is that changes in deferred revenue have direct implications on the financial statements and taxes, and understanding this concept is critical for accurate tax reporting and financial analysis.