Thursday, May 25, 2017 4:10:27 PM
As a business, you want to recognize revenue in a period when it is earned. SO, if on Jan 1, I pay you (give you 12 million in cash) for 1 year licensing fees) that I would owe you, the following entries are made:
Debit Cash 12 milllion
Credit Income 1 million (1 month's income you are due
Credit Deferred Revenues 11 million (11 months of future income you are due
Each month, you move 1 of Deferred Revenues to Income until the 11 months is used up
Debit Deferred Revenues
Credit Income
The $12 million cash received is to pay Expenses (Salaries, taxes, legal fees, etc. as well as dividends to us shareholders. Hopefully, you don't burn through all the cash (12 million) but a portion of it. The rest stays in cash or other accounts (investments, etc.).
As long as you have licenses that renew when due, as well as signing new licenses, you have 'cash flow' coming in. ONCE THE LICENSES EXPIRE OR NEW LICENSING DRIES UP, you have no incoming cash but you still have expenses (salaries, dividends, ongoing expenses, etc. with no cash coming in. You may evenually burn the $12 million and be 'out of cash'.
As to accounting for 'executive stock comps', the accounting may get more complicated and the company 'may have to purchase stock' on the open market, but that is a whole different ballgame.
Moral of the story -- WE HAVE TO SIGN NEW LICENSEES AND RENEW EXISTING LICENSES WHEN THEY EXPIRE ! !
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