Definition of Recording a Yearly Subscription
Typically, yearly subscriptions are paid in advance or at the start of the subscription period. If the amount of a company's subscription is insignificant, the company will debit Subscription Expense and will credit Cash (or Accounts Payable).
If the amount of the subscription is significant, the company should debit the cost of the subscription to the current asset account Prepaid Expenses and credit Cash. During the period of the subscription, the company credits Prepaid Expenses and debits Subscription Expense for the amount that is expiring.
Example of Recording a Yearly Subscription
Assume that a company pays $1,200 on March 20 for a one-year subscription for a business newsletter that will begin on April 1. Also assume the company issues monthly financial statements and that the $1,200 cost is considered to be significant.
On March 20, the company debits Prepaid Expenses for $1,200 and credits Cash for $1,200. At the end of each month (starting on April 30), the company will record a deferral adjusting entry to debit Subscription Expense for $100 and credit Prepaid Expenses for $100. The 12 monthly adjusting entries will:
- Report $100 expense on each of the monthly income statements
- Reduce Prepaid Expenses by $100 so the balance sheet will report the amount that has not yet expired