Accounting management for associations often presents unique challenges, particularly regarding the recognition of membership fee revenues.
By adopting rigorous accounting practices and using appropriate tools, associations can optimize their financial management and strengthen the trust of their members and administrators.
This is what we will delve into in the next article. Enjoy your reading!
Recognition of membership fee revenues
A common issue in the accounting management of associations is the difficulty in preparing monthly financial statements that are free from fluctuations due to membership renewal periods. For example, if a large percentage of members renew in September and October, the revenues in the financial statements for these two months will be skewed upwards, while for the other ten months, the revenues will be skewed downwards.
To level revenues over the months, it is necessary to implement a revenue recognition process. This involves applying membership and renewal revenues against an account titled "Deferred Revenues." Each month, one-twelfth of this amount is transferred to revenues.
Concrete example of accounting management for associations
Let's take the example of the Nature Friends Association, a non-profit organization that offers annual membership to its members. The association decided to implement a revenue recognition process to better manage its finances and avoid fluctuations due to membership renewal periods.
In January, the association receives an annual membership fee of $600 (excluding taxes) from a new member. At the time of membership, the following accounting entry is made:
Debit : Cash - $600
Credit : Deferred Revenues - $600
Each month, one-twelfth of this amount is transferred to revenues to smooth out the revenues over the year. The monthly entries are as follows:
Debit : Deferred Revenues - $50
Credit : Membership Revenues - $50
Thanks to this process, the Nature Friends Association can present more realistic monthly financial statements and avoid revenue spikes in September and October when most members renew their memberships. This way, revenues are evenly distributed over the twelve months of the year. The monthly income statement presented to administrators is therefore more realistic. Additionally, the balance sheet, through the balance of the "Deferred Revenues" account, indicates upcoming membership revenues that have already been collected.
By adopting this method, the association has also been able to better plan its activities and expenses, having a clear vision of future revenues already collected. The balance of the "Deferred Revenues" account in the balance sheet indicates upcoming membership revenues, allowing administrators to make more informed financial decisions.
Furthermore, the association decided to use the Membri 365 software to automate this process. Each month, the software automatically records transactions in the accounting books and applies the necessary business rules. This has saved time and increased administrator satisfaction by providing more accurate and reliable financial statements.
Imperfect world: Business rules to follow
Of course, the world is imperfect, and there are several situations or business rules that we must consider in the accounting management of associations. Here are a few:
Membership duration other than 12 months
In some associations, the membership duration is not necessarily annual. It can be six months, two years, or other. In this case, it is important to calculate the correct percentage to have accurate revenue recognition.
Advance payment
If a member renews their annual membership for the period from January to December but makes an advance payment in November or December, it is important not to recognize any revenue for this membership before January.
Late payment
For an association where membership is optional, membership fees should not be recognized as revenue before receiving the payment. But what happens if the member pays in March for their annual renewal from January to December?
To follow good accounting practices, no revenue should be recognized before receiving the payment for a membership. In March, we will receive the membership fee and make entry #1 to record the deferred revenues (see entry #1). For the revenue recognition entry in March, we will recognize three-twelfths of this amount as revenue. Here are the entries that need to be made:
Entry #1 at the time of receiving the payment for the renewal:
Debit : Cash - $600
Credit : Deferred Revenues - $600
Debit : Deferred Revenues - $150
Credit : Membership Revenues - $150
The following monthly entries:
Debit : Deferred Revenues - $50
Credit : Membership Revenues - $50
File opening fees:
In some associations, when a member registers for the first time, a file opening fee is charged in addition to the annual membership fee. The revenue from the file opening fee can be recognized upon receipt of payment. In this case, the revenue from the file opening fee can be recognized upon receipt of payment. Let's assume an annual membership fee and a file opening fee of $75. The first accounting entry should be as follows:
Entry #1 at the time of receiving the payment for the renewal:
Debit : Cash - $675
Credit : Deferred Revenues - $600
Credit : Revenues (File opening fees) - $75
Q&A on revenues management
At Vendere, we often receive questions about revenue management, particularly regarding the recognition of membership fee revenues. Associations wonder how to prepare accurate monthly financial statements despite fluctuations due to membership renewal periods.
Partial month
We receive several questions about revenue management for memberships made mid-month. For example, what should we do for a member who signs up for a year on March 7 or March 21, and whose annual renewal date will also be March 7 or March 21?
There are a few scenarios. But in the vast majority of cases, the association will want to recognize a full month of revenue in March if the membership is made before the middle of the month (i.e., before March 16), and not recognize any revenue in March otherwise.
To make this even clearer, some associations will adjust the start and end dates of the membership to align with revenue recognition periods. So, in the case of a membership on March 7, the renewal anniversary date will be March 1 of the following year, while for a membership on March 21, the renewal anniversary date will be April 1.
Facilitating the life of associations
Accounting management for associations can be complex and time-consuming, especially when it comes to recognizing membership fee revenues. To simplify this process and improve efficiency, our Membri 365 software offers solutions tailored to the specific needs of associations.
Observed benefits of automation with Membri 365
Time savings: Before automation, administrators spent an average of 20 hours per month managing accounting entries manually. After automation, this time was reduced to 5 hours per month, saving 15 hours per month or 180 hours per year.
Error reduction: Before automation, about 5% of accounting entries contained errors, requiring subsequent corrections. After automation, the error rate was reduced to 1%, resulting in an 80% reduction in accounting errors.
Improved administrator satisfaction: Before automation, administrators were often frustrated by errors and the time spent on accounting. After automation, administrator satisfaction increased due to the accuracy and efficiency of Membri 365.
Financial transparency: Before automation, monthly financial statements were often biased and unreliable. After automation, financial statements became more accurate and reliable, offering better financial transparency.
Membri 365
Our solution can be configured to meet your revenue recognition needs. For several accounting systems, it can automatically record transactions in your accounting books each month. Additionally, it automatically processes the business rules described above. Don't you think this feature would save you time while increasing administrator satisfaction by providing more accurate and reliable financial statements?
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