Answer is Yes. - Posted by AlexCO
Posted by AlexCO on September 20, 2008 at 11:24:42:
I hoped some accountant will come out here to explain before I come out.
I am not a CPA, but I had worked on an Accounting software for small businesses in 80’s and early 90’s.
I still do my bookkeeping all by myself, and my business is of course an accrual base.
For easy remembering, think this way.
Generally in accrual accounting, the income is posted on the date of your invoice.
The expense is posted on the date of the vendor’s invoice (or when you received their invoice in the mail).
And forget about when you actually receive/pay money.
In rental case, the invoice is created when it is due.
(In many “business lease” case, however, the invoice may be created for the entire lease period when the lease is signed, though.)
In your case, the customer’s deposit or pre-payment is posted to a Liability ledger when received, not the Income or Assets ledger yet. This is because the customer has the right to demand the return of the deposit ANYTIME BEFORE the invoice is created (or the payment is due).
Think it as a FREE LOAN from your customer to you (or your business) until the customer’s payment is due.
On the day the customer’s payment is due, your accounting system (or accountant/bookkeeper) will move the customer’s deposit from the Liability Ledger to the Assets (Account’s Receivable) ledger as the cusomer’s (actual, not pre-) payment. At the same day, You create the invoice for customer’s corresponding month’s rent in your Income ledger (and an offsetting entry to the Assets=Account’s Receivable ledger).
I beleive that is the proper bookkeeping procedure in acrual accouning to treat the deposit.
Therefore, your understanding is correct. For tax purpose, your customer’s payment is recognized when it is due, even though he/she may pay earlier.