Deferred Revenue Overview

What is Deferred Revenue?

Deferred Revenue relates to Invoicing customers (by charging to A/R or collecting payment) for Inventory that cannot be shipped on an Order due to Inventory shortage/Backorder.

Essentially, Deferred Revenue is a Liability. We Invoiced an Order which debited an Asset (either cash or A/R). Normally, to offset this Asset, we credit Sales Revenue. However, in this case we have not actually earned that Revenue so instead credit the Deferred Revenue Liability account

How Can I turn Deferred Revenue On/Off?

Deferred Revenue is an optional feature in AcctVantage. You can activate/deactivate Deferred Revenue via the Administration ➤ System Setup ➤ Sales & Purchasing screen. (By default, Deferred Revenue is turned off.)

Also, you must make the Invoice Qty column Visible and Enterable on the Sales Order entry screen. This is done via the Administration ➤ System Configuration ➤ Line Items ➤ Edit Detail Column Configuration screen. Even when turned on, Deferred Revenue must be indicated manually for any particular Order by entering a Qty Invoiced > Qty Shipped. (AcctVantage will never automatically book an invoice to Deferred Revenue.)

How is Deferred Revenue used?

When entering a Sales Order, AcctVantage tracks several Qty related values.

  • Order Qty: The quantity of units that the customer wishes to receive.
  • Ship Qty: The quantity of units that you are shipping from available Inventory for this order.
  • Back Order Qty: This is the difference between Order Qty and Ship Qty. This amount is either entered automatically or manually depending on your System Setup preferences.
  • Invoice Qty: The quantity of units that you are billing the customer for.
    • This is where Deferred Revenue comes into consideration. Normally, AcctVantage will match the Invoice Qty and Ship Qty so that you are invoicing a customer for only those units that have been shipped. With Deferred Revenue, the user can manually update the Invoice Qty to match the Order Qty and then issue an Invoice for the full amount of the Order without regard to the actual ship quantities.
    • Note: By default this column is not visible to the end user. It can be activated via the Administration ➤ System Configuration ➤ Line Items ➤ Edit Detail Column Configuration section.

How does Deferred Revenue affect my GL?

When an Invoice posts with a Deferred Revenue entry (Invoice Qty is greater than Ship Qty), AcctVantage automatically posts the deferred amount to the designated Deferred Revenue liability account. This account is assigned via the Product Class to which item belongs.

For example, let’s say a customer wants to buy a special order item for $100. You wanted to collect payment prior to ordering the item from your Vendor, so you’ve collected a $100 check and entered an invoice for the item indicating the following:

  • 1 unit Ordered
  • 0 units to Ship
  • 1 unit Backordered
  • 1 unit Invoiced.

You then post the Invoice and see the following GL entries:

  • $100 Debit to Cash for the payment received
  • $100 Credit to Deferred Revenue Liability

Because you have not delivered anything yet, you will not recognize any Sales Revenue. You owe your customer $100 worth of goods, so it has been properly recorded as a liability on the GL.

How do I get from Deferred Revenue to Recognizing the Income?

In the example above we backordered 1 unit of a special order item. When using deferred revenue, you’ll process your backorders just like any other backordered item. When units are brought into stock, you’ll fill the backorder and generate a new sales order/invoice (i.e. Ord-BO) to ship the units. When you generate the new Order to fill a backorder, AcctVantage will recognize that Deferred Revenue was used on the original invoice. On the new Order, AcctVantage will automatically mark the Ship Qty = 1 and the Invoice Qty = 0. When this Order is Shipped/Invoiced and Posted, you will see the following GL entries:

  • $100 Debit to Deferred Revenue Liability (this clears the Credit to Def. Rev. in the previous step)
  • $100 Credit to Sales Income
  • $some dollar amount Credit to Inventory
  • $some dollar amount Debit to Cost of Goods Sold

How about the short version of this overview?

Here’s the basic flow of a Deferred Revenue transaction:

  1. Enter an Invoice Qty for a Backordered item. Deferred Revenue liability is credited for the amount Invoiced minus the amount Shipped.
  2. Process the backordered item (issue and receive a PO, build the item, etc.) and generate a Sales Order to fill the Backorder.
  3. Process the new Sales Order (Ord-BO) and post. Deferred Revenue is debited and Sales Income is credited.

What Happens if I Need to Cancel a Backorder that has Deferred Revenue?

If a backorder is voided, and it was involved in a Deferred Revenue Invoice, then AcctVantage will automatically issue a Credit Memo to the customer for the item. The credit memo will not affect inventory qty, but will debit the deferred revenue account and credit the payment type (AR, Cash, etc.)

This does 2 things, it clears out the Deferred Revenue liability and A/R account and also ensures that your Product sales history is accurate.