Prepayment Liability Account

I was going though old emails on the listserv today and came across this from Tom B. regarding the Prepayment Liability Account. It's helpful information.

The name actually has been used in TIMSS for over 20 years and originally came from an accounting professor at the University of Chicago who consulted on the first design of the old RAMS accounting system and has been used ever since. (I even heard today that iMIS uses the same term but I can't verify that personally.)

The idea and accounting behind it is that when money comes into the organization and is applied to an order that has not been invoiced yet, you cannot consider that to be any kind of revenue because you haven't fulfilled any commitment on your part, i.e. shipped a product. When there is an active order for membership or subscription, the typical thing is to call these amounts Deferred Revenue. For inventoried products, these prepayment amounts are obviously liabilities to the organization until the product is shipped. If you don't ship, you owe the customer the money back. Once shipping takes place, the amount is transferred to a revenue account. Thus begat the term "Prepayment Liability" since this was an amount applied to a specific order prior to shipping and was applied to a GL account that appears on the liability section of the balance sheet. So, a PPL is a liability account. It is a form of deferred revenue but a special one that separates money received that isn’t yours yet because you haven’t invoiced versus money you know you will earn if you only follow through with scheduled deliveries of subscriptions or memberships.

Applies to: TIMSS5 & TIMSS6