Expert: Ed McFarland - 12/19/2005

Question
I know that when a customer pre-pays for services, a corporation books it as unearned income, and if the corporation doesn't deliver the services, the money has to be refunded. But I'm not clear on what that refundable money is: is it a debt or classified as something else? Is it defined or covered by the GAAP? I need to know what to call it or how to define it before I can go into a settlement negotiation. Thanks very much for your help!

Answer
Prepaid items that a company owes is kept on the balance sheet as a liability. It should be its own account. As the service is rendered the liability is reduced and added into sales.

If you refund the money, you would reduce both prepaid liabilities and and cash.

Hopes this helps.