See also IRS Letter Ruling 7943156. But it doesnt have to be. If the company fails to deliver the promised product or service or a customer cancels the order, the company will owe the money paid by the customer. gst on unearned revenue ato - thenscaa.com If you account for your assessable income on an accruals basis, you include all income earned for work done during the income year. 460 or the rules for the treatment of deferred revenue in tax-deferred transactions. Proc. 1964). If he uses the: cash basis method - he includes the $7,240 (minus any GST) in his assessable income for 2022-23 income year because he received payment in that income year accruals basis method - he includes the $7,240 (less any GST) in his assessable income for the 2021-22 income year because he did the work in that income year. 17See AICPA letter to Andrew Keyso Jr., IRS associate chief counsel, dated April 23, 2015, regarding the tax treatment of deferred revenue in taxable asset acquisitions, available at www.aicpa.org. This means that two journal entries are made for unearned revenue: when its received and when its earned. Since its been established that the advertising agencys services wont be fulfilled until the following year, they havent legally earned revenue during the current year despite being paid $20,000. This article reviews the treatment of unearned revenue also referred to as deferred revenue from a financial accounting and tax point of view and focuses on how it can affect the seller, as well as the buyer, in a taxable acquisition. Dont worry, our consultations are 100% Confidential & 100% Free, Many businesses keep track of their finances as their goods or services are provided. We use analytics cookies to ensure you get the best experience on our website. Deferred income - Wikipedia Under the cash method of accounting, XYZ would recognize $100,000 of revenue, matching the cash collected, and would recognize $8,000 of expense in year 1. Small businesses receive unearned revenue when a client pays for goods or services before the business sends the goods or performs the service. This is clearly marked. The tax code is an account's tax rate, and determines how Xero treats the transactions for GST purposes.