Prepaid Service Plans: How to Keep Them Straight in Your Books

What prepaid plans need to track

A prepaid service plan is not one number. It is the payment that came in, the services you still owe, the income you have earned so far, and the income still waiting to be earned. Each part needs its own line so your monthly income stays true.

When you track all of it by plan, you can see how much real work you have earned this month and how much work you still owe. When you do not, you get one big pile of payments and no way to tell whether the busy month was earned income or just a big prepaid check.

Many service trades run prepaid plans. Pest control, pool service, hvac maintenance, security monitoring, cleaning contracts. A customer pays for a year up front, or for a season, or for a set of visits. You take the money today. You do the work over time. The two do not happen on the same day. When the books hold the payment apart from the earned income, the business makes sense. You can read more about how we keep these lines tied on our bookkeeping page.

Here is what a clean plan looks like.

When the payment and the work sit on their own lines, your monthly income is true. When they sit together, a big prepaid check looks like a huge month and the next month looks slow.

How a prepaid payment shows up in your books

A prepaid payment is money you take before you do the work. A customer pays for a year of service in January. You owe them twelve months of visits. The cash is in your bank, but the income is not earned yet.

The clean way is to book the prepaid payment to a liability account, not to income. The full amount goes in as unearned income. The same amount lands in your bank as cash. Your balance sheet shows what you owe in service. Your profit and loss does not move, because money for work you have not done is not income yet.

The messy way is to book the prepaid payment straight to sales. Now January looks huge. February through December look slow. Your books show a giant month and then nothing, even though the work runs all year. Your CPA has to sort it out at year end and the real monthly income hides until then.

Here is how to keep the prepaid payment clean.

• **Book the prepaid payment to an unearned income account: ** not to sales.
• - **Match the payment to the bank deposit: ** the two should agree the day it lands.
• - **Keep one plan balance per customer: ** so you can see what each plan still owes.
• - **Tag the plan to the customer: ** so the earned income sorts by account.
• - **Watch the plan balance drop: ** as you earn the income, the liability goes down.

When the prepaid payment sits in a liability account, your books show what you owe. When it sits in sales, your books show income you have not earned.

How earned income shows up over time

The earned income is the part of the prepaid plan you have delivered. Each time you do a service visit, a piece of the prepayment becomes real income. The rest stays as a liability until you earn it.

The clean way is to move a piece of the prepayment from unearned income to earned income each time you do a visit. A yearly plan gets split into twelve parts. A quarterly plan gets split into four parts. Each visit earns its part. Your monthly income shows what you really earned that month, not what you collected. The liability drops as the income goes up. The two always move together.

The messy way is to leave the full prepayment in sales and never move anything. Now your monthly income is wrong every month after the first one. You can not tell how much real work you did in June, because the books still show the big January check. You can read more about how we track recurring service in our pool service company guide. The same idea works for any prepaid plan.

Here is how to keep the earned income clean.

• **Move the earned part to income each time you do a visit: ** not all at once.
• - **Split the plan into even parts: ** twelve for a year, four for a quarter.
• - **Drop the liability by the same amount: ** so the two always move together.
• - **Log each visit the day it happens: ** not at month end from memory.
• - **Watch the plan balance go to zero: ** when the plan is done, the liability is gone.

When the earned income moves as the work goes out, your monthly income is true. When it sits in one pile, every month after the first one is wrong.

How to match each plan to the bank

Every prepaid payment has to match the bank. The customer pays you. The cash lands in your account. The books need to tie the two together.

The clean way is to match each prepaid payment to the bank deposit the day it clears. The amount in the books agrees with the amount that hit the bank. When a customer pays for a year up front, the payment and the deposit agree. When a customer pays in installments, each installment matches on its own day. The plan balance grows as each payment lands. The bank and the books always agree.

The messy way is to book the payment and never match it to the bank. Now the books show a payment that may or may not have cleared. A check that bounced sits as income. A deposit that arrived late sits as unearned income from the wrong month. The plan balance does not match what really came in.

Here is how to keep the match clean.

• **Match each prepaid payment to the bank deposit: ** the day it clears.
• - **Watch for bounced payments: ** a payment that did not clear should not stay on the books.
• - **Watch for late deposits: ** a payment that cleared late goes in the right month.
• - **Reconcile the unearned income account: ** so the liability matches what you still owe.
• - **Check the plan balance against the service schedule: ** so you know what is left to earn.

When each payment matches the bank, the plan balance is true. When they float untied, the liability drifts and the real income hides.

How to handle renewals and plan changes

A prepaid plan does not run forever. Plans renew. Plans change. Plans end. Each one needs a line.

A renewal is a new prepayment for the next period. The customer pays for another year. You book the new payment to unearned income and start earning it over the new period. The old plan finishes and the new one starts. The two should not blend.

A plan change is a shift in the middle. A customer upgrades from a quarterly plan to a yearly plan. A customer adds a service. A customer drops a visit. Each change needs to move the liability and the earned income to match the new plan. The books should show the new schedule, not the old one.

A plan end is the last visit. The plan balance goes to zero. The unearned income is gone. If the customer does not renew, the account goes quiet. If the customer renews, a new prepayment starts the cycle again.

Here is how to keep renewals and changes clean.

• **Book a renewal as a new prepayment: ** not as a continuation of the old plan.
• - **Move the liability when a plan changes: ** so the balance matches the new schedule.
• - **Move the earned income when a plan changes: ** so the monthly income matches the new visits.
• - **Mark a plan done when it ends: ** so the balance goes to zero and the account stays clean.
• - **Watch the renewal rate: ** a plan that does not renew is worth a closer look.

When renewals and changes sit on their own lines, the plan story stays clear. When they blend, the books drift and the real income hides.

How the month end close works

At month end, every prepaid plan needs its lines added up. The prepayment, the earned income and the plan balance all pull together. The liability shows what you still owe. The income shows what you earned this month. The two move together.

We start with the bank. We match each prepaid payment to the deposit that cleared. We move the earned part from unearned income to sales for each visit that went out. We check the plan balance against the service schedule. We mark done plans as done and book renewals as new prepayments. Then we add up the month by plan. We send you the profit and loss report, a balance sheet, and a cash summary. The earned income and the unearned income sit inside the report, side by side.

Here is a simple month end check.

• **Match each prepaid payment to the bank: ** every deposit cleared.
• - **Move the earned income for each visit that went out: ** not all at once.
• - **Drop the liability by the same amount: ** so the two always move together.
• - **Check the plan balance against the service schedule: ** so you know what is left.
• - **Mark done plans as done: ** and book renewals as new prepayments.
• - **Run the profit and loss by plan: ** so the earned income shows per account.

When the close runs every month, the plan story stays clear. When it skips a month, the liability drifts and the real income hides.

A situation we clean up

The prepaid check that looked like a huge month

A pest control shop sells yearly prepaid plans and one time treatments at the same time. Every payment, prepaid or one time, lands in one general sales line. A customer pays for a full year in January and the books show it all as January income. February through December look slow, even though the techs do visits every week. At year end, the owner can not tell how much real work the shop did each month, because the prepaid checks sit in the month they were paid. The owner can not tell which plans are worth keeping and which ones cost more than they bring in.

Here is how we handle it. We set up an unearned income account in QuickBooks Online. We go back through the open months and move each prepaid payment out of sales and into the liability account. We split each plan into even parts by visit. We move the earned part to sales each time a visit went out. We match each payment to the bank. We check the plan balance against the service schedule. When we are done, the owner can run the profit and loss by month and see the real earned income, not the prepaid checks. We set up a rule so the next prepayment goes to unearned income from the start.

Mistakes we fix

• A prepaid payment booked straight to sales instead of unearned income
• A yearly plan booked as one month of income and eleven months of nothing
• No unearned income account set up at all
• A visit that went out but the earned income never moved
• A plan balance that never matched the service schedule
• A renewal booked as a continuation instead of a new prepayment
• A plan that ended but the liability stayed on the books
• A bounced payment that sat as income after it did not clear
• No profit and loss by plan run at month end
• The prepaid checks hiding the real monthly work

Common questions

How do I record a prepaid service plan? Book the prepaid payment to an unearned income account, not to sales. The full amount goes in as a liability and the same amount lands in your bank as cash. Your balance sheet shows what you owe in service. Your profit and loss does not move, because money for work you have not done is not income yet.

How do I earn the income over time? Move a piece of the prepayment from unearned income to earned income each time you do a visit. Split a yearly plan into twelve parts and a quarterly plan into four parts. Each visit earns its part. The liability drops as the income goes up.

How do I match a prepaid plan to the bank? Match each prepaid payment to the bank deposit the day it clears. The amount in the books should agree with the amount that hit the bank. Watch for bounced payments and late deposits so the plan balance stays true.

How do I handle a renewal? Book a renewal as a new prepayment, not as a continuation of the old plan. The old plan finishes and the new one starts. When a plan changes, move the liability and the earned income to match the new schedule. When a plan ends, mark it done so the balance goes to zero.