Journals Subscription Revenues
STEVE COHN, DUKE
Accounting for Subscription Revenues on an Accrual Basis
Because customers ordinarily prepay journal subscriptions for an entire year, generally accepted accounting principles dictate that revenues received as subscription payments must be counted as fully earned by the press only after all the issues covered by the payment have actually been mailed to the subscribers. The rationale for using an accrual basis rather than a cash basis to account for subscription revenues is that, at any given time, the press has an unearned revenue liability: if the journal were to stop producing issues, the press would have to refund subscribers' money. (Note that issue-related expenses, such as production and mailing costs, should also be expensed on an accrual basis and not counted until the relevant issue has been mailed.)
In cases where a press, or any organization, has been accounting for a journal on a cash basis-- as sometimes happens when an organization publishes few journals--the conversion from a cash basis to an accrual accounting system for journals is likely to involve a considerable one-time cost, since the amount of revenues that needs to be moved from earned to deferred accounts is likely to be far larger than the amount of the expenses that can be deferred (both because issue-related expenses are only a portion of a journal's total expenses, whereas subscription revenues usually constitute the bulk of the journal's income; and because, on a cash basis, expenses are paid close to the time of an issue's mailing, while subscription revenues are often received far in advance of even the first is sue-mailing).
Nonsubscription revenues are generally not issue-linked (i.e., no repayment would need to be made if the journal were to stop publication). These revenues can therefore be accounted for on a simple cash basis.
Keeping the Books under an Accrual Accounting System
All the standard computerized recordkeeping systems for subscription fulfillment have provisions for keeping track of earned and deferred income. For example, when a prepayment is received for a quarterly journal, these systems automatically count the payment as deferred income. When the first issue of that journal is mailed to the customer, the system moves one-fourth of the subscription amount paid into the earned revenues category.
The actual funds must at some point be transferred from one account to another to match the fulfillment system's accounting. The accrual accounting is best handled by depositing all subscription income to a holding account for deferred (also called "unearned") income. Then, after each issue is mailed, the funds that have been received as subscription payments are moved part by part from the deferred account to the earned revenues account. Ordinarily, these transfers are made on a monthly basis rather than just after the mailing of an issue. This is because the amounts to be transferred include both payments for those issues mailed in the regular bulk mailing also payments covering previously published issues (for example, when a renew al payment comes in after the first issue of the renewal term had already been mailed), which would be mailed immediately upon receipt of the payment. Another system, used by some presses, is to deposit all subscription revenues directly into the press's operating account and then to transfer out the remaining deferred revenues (and expenses) at the end of each fiscal year.
Some presses use a single account for all deferred revenues and then keep track internally of the contributions of each individual journal to that account. Others have separate deferred-income accounts for each journal, which allows for easier troubleshooting when the financial account does not balance precisely with the amount reported by the subscription recordkeeping system.
Matching the actual revenues deposited to and transferred from the deferred-income account with the figures reported by the subscription fulfillment system is necessary, and (at least with some of the systems) it can sometimes be tricky. Straightforward transactions should create no problems, but more complicated ones (e.g., refunding a payment in full after one of the issues paid for has already been mailed and the funds for it transferred from deferred to earned) can easily throw the books off unless they are tracked on a regular basis. The task of reconciling the accounts can be done either by the business office of the press or by the journals fulfillment department, but ideally the two should work together here, since the business office is ultimately responsible for tracking the press's finances and working with outside audits, while the journals people will know better the intricacies of their fulfillment procedures.
Provisions for Reporting Subscription Revenues Held for External Organizations
Many of the journals published by university presses are not owned by the presses themselves. In many cases a journal's revenues belongs to an external organization (often a scholarly society), with the press being paid some form of commission or fixed fee for managing the publication. While these external organizations should follow accepted accounting principles by using accrual accounting, many (particularly the smaller organizations) have not, in fact, been doing so and are reluctant to make the change.
A press need not insist on conversion of the accounting systems in order to work with an external organization. If a press is to adhere to a strict accrual accounting method, then it must still account for its management fees (particularly if these
are issue-related in some way, such as a percentage of revenues or expenses) on an accrual basis, but it can at the same time report to the external organization on a cash basis. For a "commission" journal, that may mean that the amount of the management fee (as a percentage of revenues) reported to the external organization for a given year does not match the amount actually earned by the press: at any given time, some of the management fee collected by the press on a cash basis will reside in the deferred account until the issues connected to that portion of the fee have been mailed. In actual practice, many presses do not defer the management fees in such instances.
Should Interest Be Paid on Deferred Accounts?
The amount of money in the deferred-income account varies throughout the year (since many subscriptions are paid on a volume basis, it is likely to be largest at the beginning of the volume- year, when many payments have been entered but no issues have yet been mailed). At some points during the cycle, it is likely to be well over half of the journals program's annual revenues, so it can be quite a large amount of money.
Practices vary--depending, at least in part, on how tightly intermixed the finances of the press are with the finances of its parent university--as to whether interest is earned by the journals program on its deferred revenues account, but typically the interest is credited to the journals program. Similarly, practices vary as to whether interest is paid to external organizations on those funds held by the press on their behalf. Some presses account for and report such interest scrupulously; others make no such provisions at all. Obviously, a press that is able to pay interest on funds it holds in deposit has a competitive advantage in seeking journals con tracts with outside organizations.