When managing finances in any business, especially in industries that deal with deposits, gift cards, or account payments, it’s crucial to differentiate between “future revenue” and “current sales revenue”. This distinction becomes particularly important when tracking how and when funds should be recognized as income on financial reports, such as the cash control “float reports.” Let’s break down the difference between these two forms of revenue and how they are reflected in financial statements.
Future Revenue: Deposit Liability
Deposits, gift cards, or prepaid accounts represent funds accepted by your business but not yet earned. These funds should be categorized as “liability” rather than “income” until a product or service is delivered. Why? Because no merchandise or service has been provided at the time these funds are collected, meaning your business is “holding” the money on behalf of the customer.
This is crucial to understand from a financial reporting perspective. Although your facility or staff has taken in cash, check, or credit card payments, those funds are not considered “earned income” until they are applied to an actual sale.
For example:
- A deposit placed for a future event is a liability until the event occurs, and the service is provided.
- A gift card purchase is also a liability until it is redeemed for goods or services.
This liability will appear on specific reports, including:
- Event Deposit Report: Track outstanding event deposits.
- Account Balances Report: Any outstanding balances on customer accounts, negative and positive, can be viewed here.
- Cashless Card Balance Report (for gift cards): To see the current balance on stored value or gift cards.
Until these amounts are used for merchandise or services, they remain liabilities on your balance sheet.
Today’s Revenue: Recognized Sales
On the other hand, when a customer makes a purchase, that’s when the business earns income, and the revenue should be recognized on the date of sale. For instance, if a customer uses a gift card to purchase an item, at that moment, the liability is removed from your books, and the transaction becomes revenue.
To illustrate:
- If you sell two gift cards (one for $20 and another for $10), the money received shows up as a liability, not income, because no merchandise has been exchanged yet.
- When the customer uses $15 from the gift cards to buy an attraction ticket, that’s when you can recognize the $15 as income. The (Date Sales and Income Report) will show this transaction as a sale, and the system will indicate that the payment was made via stored value (i.e., the gift card).
This differentiation is critical for tax purposes as well. Your Date Sales and Income Report ensures clarity, showing when actual revenue was earned versus just collected. When a customer redeems a gift card or deposit, that’s when the revenue is realized.
Cash Control and Float Reports
The float report is another valuable tool for managing day-to-day cash control. This report only shows collected funds and doesn’t account for whether the funds are categorized as current revenue or still listed as a liability. Therefore, while the float report helps ensure that all collected payments (cash, check, or credit card) are accounted for, it doesn’t indicate whether those funds are linked to current sales or future liabilities.
Key Takeaways:
- Deposits, gift cards, or account credits are liabilities until they are used. You’ve received money, but no merchandise or service has been provided.
- Revenue is recognized when merchandise is sold, or services are rendered. Until that point, the money remains in a liability account.
- Reports to manage liability:
- Event Deposit Report: helps track future event deposits.
- Account Balances Report: shows outstanding account payments.
- Debit Card Balance Report: helps track gift card or stored value balances.
- Transaction reports differentiate between income and liabilities: When a customer uses a gift card, the transaction is recorded as income only when merchandise is bought, not when the card is sold.
By understanding these distinctions and using the appropriate reports, you’ll be better equipped to manage your facility’s finances accurately and comply with reporting requirements.