Some employers pay a quarter or a year in advance. The cash is great, but it's for service you haven't given yet. How it's recorded changes what your P&L shows each month, and treating the whole payment as money you can spend can leave you short later.
Two ways to record it
- Cash basis: the whole payment is revenue the month it arrives. One big month, then nothing from that employer until the next payment.
- Accrual basis: the payment is recorded as a liability, often called deferred revenue, and moved into revenue month by month as the service is given.
Which one your books use is a decision you make with your CPA. Here's how to choose. Your bookkeeper should record it the same way every time.
An example
In a made-up example, an employer pays $25,200 on January 5 for 30 members at $70 for the year.
- On cash basis, January shows $25,200 of employer revenue and February through December show none from this employer.
- On accrual basis, each month shows $2,100, and the unearned part sits on your Balance Sheet, starting at $23,100 at the end of January and falling by $2,100 a month.
Don't spend it twice
Even on cash basis, think of the money as covering the year. If you spend most of it in the first quarter, you'll be serving those members for nine months with no cash coming in from them. You can move prepaid amounts to a separate savings account and transfer one month's share back each month.
Watch the refund terms
If the contract allows a refund for unused months, the unearned part may have to go back. This post covers early exits.
Individual annual memberships
The same approach applies to individual members who pay a year up front. Here's how that works.
What I'd do this week
- List every employer that pays more than a month at a time.
- Ask your bookkeeper how those payments are recorded.
- Check how much of each prepayment covers months still ahead.
Common questions
Should I offer a discount for paying a year up front?
You can. Make sure the discount is worth the cash timing to you, and that the refund terms are clear.
Does prepayment change my taxes?
It can, depending on your tax method. Ask your CPA how prepaid fees are taxed for your practice.
What if the headcount changes mid-year?
Bill or credit the difference under the contract terms. Check what headcount the prepayment covered.
Want prepaid contracts that don't distort your P&L?
We reconcile every account every month and send your P&L and Balance Sheet by the 15th, so decisions like this start from real numbers. If that's what you need, apply to work with us.