My client is a cash basis dance studio that provides lessons to young children for a monthly fee based on the classes they take. All that income is recorded as income when received. However, in the fall, the studio collects payments from all it's students for the entry fees to go to competitions. These fees are what is charged by the dance competition companies. My client collects these fees and then sends them to the dance competition companies in the following year. The competitions take place in the spring. Am I correct in thinking that this should not be considered income to my client ? Should I track this as deferred revenue since the expenses will cancel the income in the following year ? I just don't think it is right that she should have to pay tax on this income that is really not her money to keep.
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Record all deposits as a N/P Competitions. Any deposits not used for competitions should be moved to income at that time.
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If the student starts taking the classes but then finds out they can not go to the competition (before the money is sent to the competition company), does the student get that money back?Comment
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I don't know for sure but I would think the money is refunded.Comment
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There should be a written contract in place for this agreement between the dance company and the competition company regarding cancellations, forfeitures, etc.
I suggest you obtain a copy of it for your files in order to determine the proper financial reporting.
I agree that money collected for future commitments to the competition company should be reported on the financial statements as a current liability (with a separate ledger kept for each student) like an Accounts Payable system, and charged to that account when payments to the competition company are paid out, and the remaining balance left is then journalized to an income account.Uncle Sam, CPA, EA. ARA, NTPI FellowComment
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Thank you !Comment
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Similar situation is photographer who is booked for weddings a year in advance and clients pays a deposit to book. Funds essentially held in escrow until balance is paid the following year, contract is fulfilled, and expenses incurred. Contract usually provides for refunds for cancellation if circumstances are met depending on certain dates and for certain reasons. Any deposit not refunded under the contract is income to the photographer.Comment
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I agree, it is deferred income, and should be listed as deferred or Other Income. and shown as a expense when it is paid the competition company.Comment
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