A company operates an arcade place where customers put money into game membership cards and they also accumulate points for winning and can be redeemed for prizes. How to account for the credits not yet used and also the points?
I would think....
1) For Game card: Ex) put in $100 dollars, used $20, left with $80 on card
Debit Cash 100
Credit revenue 20
Credit deferred revenue 80
When the remaining 80 is used:
Debit deferred revenue 80
Credit revenue 80
Is this correct?
2) For points earned, let say customer earned 500 points (worth $50 of prizes), but not yet redeemed, how would the journal entry be for the company? And what is journal entry when customer redeems the prize?
Thanks.
Ah, accounting and arcade games, two things that go together like pinball and flippers! Let me help you with those journal entries:
1) For the game card:
Your initial entry is almost there! But instead of crediting revenue, you'll want to credit a liability account called "unearned revenue" or "deferred revenue." This shows that the company has received cash but hasn't yet provided the full service.
Initial purchase:
Debit Cash 100
Credit Unearned Revenue 100
When $20 is used:
Debit Unearned Revenue 20
Credit Revenue 20
When the remaining $80 is used:
Debit Unearned Revenue 80
Credit Revenue 80
2) For the points earned:
When customers earn points, you can consider it as a form of "loyalty points liability" since these points can be redeemed for prizes in the future.
When 500 points (worth $50) are earned:
Debit Loyalty Points Liability 50
Credit Revenue 50
When the customer redeems the prize:
Debit Loyalty Points Liability 50
Credit Inventory or Cost of Goods Sold (value of the prize) 50
Keep in mind that the specific account names may vary depending on how your company wants to classify these transactions. And remember, just like a skilled gamer, it's always good to consult with a professional accountant to ensure everything is accurate.
For the game membership cards, your initial journal entries are partially correct. However, you may want to make a few adjustments.
1) For the initial purchase of the game card:
Debit Cash $100
Credit Deferred Revenue $100
This recognizes the cash received from the customer while recording the unearned revenue as a liability on the balance sheet.
2) When $20 is used from the game card:
Debit Deferred Revenue $20
Credit Revenue $20
This recognizes the portion of the revenue that has been earned.
3) When the remaining $80 is used:
Debit Deferred Revenue $80
Credit Revenue $80
This recognizes the remaining portion of the revenue that has been earned.
When a customer earns points, you would typically not record a journal entry at that time. Instead, you would track the points earned within your database or customer management system.
4) When the customer redeems their points for a $50 prize:
Debit Prize Expense $50
Credit Accrued Liabilities (or accrued expenses) $50
This recognizes the expense incurred by the company for providing the prize while increasing the liability for the unpaid prize.
5) When the customer receives the prize:
Debit Accrued Liabilities (or accrued expenses) $50
Credit Inventory (if the prize is in inventory) or Cash (if the prize is purchased at that time) $50
This reduces the accrued liability and either increases the inventory or reduces cash, depending on whether the prize was sourced from inventory or purchased separately.
Remember to consult with an accounting professional who is familiar with your specific industry and financial reporting requirements to ensure accuracy in your accounting practices.
To account for the credits not yet used on the game membership cards, you can follow the steps below:
1) Initial sale of the game card:
Debit Cash (or Accounts Receivable) for the amount received ($100)
Credit Deferred Revenue for the amount that has not been used yet ($100)
2) When a portion of the credit is used:
Debit Deferred Revenue for the portion used ($20)
Credit Revenue for the revenue recognized ($20)
3) When the remaining credit is used:
Debit Deferred Revenue for the remaining balance on the card ($80)
Credit Revenue for the remaining balance on the card ($80)
To account for the points earned, you can follow these steps:
1) Initial recognition of points earned:
Debit Points Earned (an asset account) for the value of the points earned ($50)
Credit Deferred Revenue for the same amount ($50)
2) When the customer redeems the prize:
Debit Deferred Revenue for the value of the prize redeemed ($50)
Credit Inventory (if the prize is a physical item) or Credit Services Revenue (if the prize is a service)
Important Note: The above journal entries assume that the company recognizes revenue as the customer uses their game card credit or redeems their points. It is also possible for the company to recognize revenue upfront when the game card is sold and the points are earned if the company follows a different revenue recognition policy.
It is always recommended to consult with an accountant or financial professional for specific guidance tailored to your company's accounting practices and standard accounting principles in your region.