This post appears as part of Photographer's Month.
As part of Photographer's Month, we'll be geeking out to help you with accounting questions specifically for photographers. Here's some very targeted information on how to handle deposits and retainer fees when accounting for your photography business.
Here's the scenario: It's October 31, of Year 1. The Smiths hire you to shoot the engagement photos right now, and their (undoubtedly lovely) wedding next May, in Year 2. They pay you the full fee up front. The hitch: Your fiscal year-end is December 31, so the invoice you gave them includes income you'll earn in Year 1 (engagement photos), and other income you won't earn until Year 2 (wedding photos).
What do you do to make sure your income tax is squared away? Here's how you do it.
(Note: We assume you're using Wave, but the instructions should more or less apply even if you're using something else. If you're not using Wave to do the accounting for your photography business, though, you may want to check it out!)
- Let's assume for the sake of this example that the full fee for the engagement and wedding shots is $1,000; of that, $200 is for the engagement shoot, and $800 is basically deposit for the wedding. In other words, $200 is income in Year 1, and $800 is income in Year 2.
- In Wave, you'll first need to set up a Prepaid Income account. If you haven't already done this, you'll find the instructions in our FAQs.
- Go to your Income tab and click on Create Invoice.
- Fill out your client’s information, and choose your product. If you’re creating a new product, make a mental note of the Income Account you choose (probably Sales or Services or something like that). Enter the total invoice amount (in this case, $1,000). Save or Save and Send it.
- Right now, the entire amount is categorized as income in Year 1, but you only want the work that you did in Year 1 ($200 worth of work, for the engagement photos) to appear in Year 1's statements. The solution is to move the $800 that has not yet been earned from the income account where it sits now into Prepaid Income. To do this, you record an "adjustment journal transaction."
- Go to Settings and click on Journal Transactions, then Add Transactions. Add a description (something that will make sense to you later, like "Smith Engagement & Wedding") and choose the last day of your fiscal year (for most people it is December 31) as the transaction date.
- To record the journal transaction, from the first drop-down menu choose the income account. (The income account is associated with the Product. If you don't remember what account you used, you can find it under Settings > Products > Edit.) Under the Debit column, enter the amount of the income you need to move to Year 2 — in other words, the amount of the prepayment that you haven’t delivered on yet. In our example, since only $200 of the $1,000 payment has been earned, the amount of unearned income to enter is $800.
- In the next row, choose the Prepaid Income account from the drop-down menu and under the Credit column, record $800 (the amount we just calculated, above). The Debit and Credit columns should equal, as indicated by the Total values. Click Save.
- You're now in good shape for Year 1, and you can use your totals in Wave to file your taxes properly, etc.
- In Year 2, once the wedding shoot occurs you need to complete a Journal Transaction to reflect the $800 you’ve now officially earned. Create a new Journal Transaction in which you debit the Prepaid Income account by $800, and credit the income account (the same one you used in the first Journal Transaction) to the tune of $800. Now the total deposit will have been moved back from Prepaid Income to the proper account.
- Save and you're done!
That was quite a bit of accounting geekery, and your accounting brain just grew 3 sizes. Congratulations! More on deposits and retainer fees coming up in Photographer's Month.
NOTE: It’s really important you make the adjustment journal entries! Otherwise, you will not be declaring your income to the government and they don’t like that.
Need help for your photography business? Wave is free, online accounting for photographers and small businesses.