Deferred Revenue
Advance payments given to a business in anticipation of future performance or delivery of goods or services are known as deferred revenue. Another name for it is Unearned Revenue.
Since revenue has not yet been earned, the recipient company records the amount as a liability on its books under the heading Deferred Revenue. As the product or service is provided over time, it is recorded in the income statement as revenue.
1. Configuring Deferred Accounting
Version 13 saw the introduction of Deferred Accounting, which is maintained in ERPNext with more stringent controls.
Examine the following settings under Accounting > Settings > Deferred Accounting Settings before using deferred accounting:
- Deferred Accounting Entry Processed Automatically
- By default, enabled.
- To post entries, you must manually process Process Deferred Accounting when disabled.
- Reserve Postponed Admissions Using
- Days (default): The amount is distributed according to the number of days in a month.
- For instance, $12,000 spread over 12 months equals £1019.17 for a 31-day month and £986.30 for a 30-day month.
- Months: A fixed amount that is equal each month. For instance, $12,000 divided by 12 months equals $1000 per month.
- Use a journal entry to book deferred entries.
- By default, the system posts straight to the ledger.
- Journal Entries are used to enter deferred revenue when it is enabled.
- Enter Journal Entries
- By default, entries are Draft when posted via Journal Entry.
- When this option is enabled, they are posted automatically**
2. How to Use Deferred Revenue
For instance, companies in the broadcasting or Internet industries typically receive full payment in advance (either quarterly or annually), but they record revenue on a monthly basis. ERPNext uses deferred revenue to accomplish this automatically.
2.1 Item Setup
- Go to Item Master.
- Select “Enable Deferred Revenue” from the Deferred Revenue menu.
- Set:
- Deferred Revenue Account
- Number of Months(recognition period)**
- Item Master > Deferred Revenue (highlighted fields).
2.2 Sales Invoice
When you make a Sales Invoice for a Deferred Revenue item:
- ERPNext debits the Deferred Revenue Account (of type liability) rather than the regular Income Account.
- The Service Start and Service End Dates will be selected automatically, as well as the account and period if they were specified at the item level.
- Sales Invoice form > Item table with Start and End dates and Deferred Revenue Account.
2.3 Journal Entry
Period’s end (monthly or quarterly, depending on setup):
- Journal entries are automatically created by ERPNext.
- These entries credit the Income Account and debit the Deferred Revenue Account.
Example:
- Sales Invoice: £12,000 (deferred) for an annual subscription.
- Acknowledgement: 12 £1,000 journal entries per month.
- Journal entry that is automatically generated (credit income, debit deferred revenue).
- The General Ledger view of deferred revenue recognition.
