Let’s assume that the cost of the one-year subscription for a monthly magazine is $24. Let’s also assume the payment is made at the start of the subscription period, and that  your company prepares monthly financial statements.

One way to enter the transaction is to debit the current asset Prepaid Subscriptions for $24 and to credit Cash for $24. At the end of each month you would make an adjusting entry to debit Subscriptions Expense for $2 and to credit Prepaid Subscriptions for $2. This approach would obviously match the annual cost to each of the 12 periods benefiting from the subscription. However, this is not practical given the small amount involved.

Thanks to the accounting concept of materiality, accountants can ignore the matching principle when the amount is insignificant in relationship to the company’s size. Since no investor or lender would be misled if the entire $24 appeared as an expense in one month and $0 appeared in the other 11 months, the following entry would be more practical: debit Subscriptions Expense for $24 and credit Cash for $24 at the time of entering the invoice into the accounting records.

If the annual subscription was $8,400 for a trade journal and other membership services, a small company will likely find that amount to be significant and should not expense the entire amount in one month.

Learn more about Adjusting Entries.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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