Hello, I renew many software license agreements during the fiscal year. These agreements are due for renewal at various time of the year and most are 12 month renewals. In case it matters, this is for a non-profit University. We recently found out that Accounting has been pulling funds for these renewals across 2 fiscal years. Can anyone explain to me the accounting principle that governs this? Do funds have to be pulled from 2 fiscal years? Any insight would be appreciated. TIA
12 month software license renewal over more than one FY
Answers
I'm going to assume when you say "funds are pulled from two fiscal years" you mean the expense is recorded over 2 fiscal years instead of all at once when paid or when the renewal is signed.
Accounting concepts include one called the "matching principle", which your accounting folks are applying here. This says, in this case, to record expense over the period of benefit. The period of benefit is the 12 months of service. Accounting will record 1/12 of the total expense to each month of the 12 month period. So when those 12 months cover part of year X and part of year Y, you will see expense in both years.
And yes, expenses must to allocated to the fiscal year, in which they are incurred. The "expense allocation" is independent from actual time, when theses bills are being paid. Software leases, Insurances, and any other services you are purchases that have to be paid upfront for a period that is longer than one month are to be booked as follows:
Payment of the annual premium: Debit: Prepaid .......rent, lease, insurance etc. Credit: Bank account
Adjustment at the time the accounts are closed at the end of each month: Debit: Monthly amount of the contract against appropriate expense account. Credit: Prepaid account.
Filed Under:
Budgeting & Forecasting