Deferred Revenue FAQ
Deferred Revenue refers to a G/L account that is used to record invoices for inventory and/or services that have not yet been delivered to the customer who placed the order. This G/L account is a liability because the customer is owed the items they were billed for.
Deferred Revenue can be enabled (or disabled) via Administration ➤ System Setup ➤ Sales & Purchasing. By default, the feature is disabled.
In order to use this feature, the Invoice Qty column must be Visible and Enterable on the Sales Order entry screen. This is done via Administration ➤ System Configuration ➤ Line Items ➤ Edit Detail Column Configuration.
Even when turned on, the system will never automatically charge an invoice to Deferred Revenue. This must be done manually during Sales Order entry.
When entering a Sales Order, AcctVantage tracks several Qty related values.
- Order Qty: The quantity that the customer has ordered.
- Ship Qty: The quantity that will be shipped.
- Backorder Qty: This is the difference between Order Qty and Ship Qty.
- Invoice Qty: The quantity that the customer will be billed for. This is where Deferred Revenue comes into consideration. Normally, the system will match the Invoice Qty and Ship Qty so that the customer is billed for only the items 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.
When an Invoice is posted with an Invoice Qty greater than Ship Qty, the system automatically credits the deferred revenue amount to the designated 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:
- Order Qty = 1
- Ship Qty = 0
- BO Qty = 1
- Invoice Qty = 1
When the Invoice is posted, the system will create the following G/L entries:
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Debit: $100 to the cash/checking/receipt type asset account to recognize the payment received. Alternatively, the system allows the invoice amount to be charged to A/R.
Credit: $100 to the Deferred Revenue liability account to recognize the customer's order has not been shipped.
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Note: Sales Income and Cost of Goods Sold will not be recognized until the backorder is fulfilled.
In the example above a backorder was created due to the BO Qty = 1. When using deferred revenue, backorders will need to be processed just like any other backordered item.
When inventory is added to stock, fill the backorder and generate a new sales order/invoice to ship the order. This backorder-filling sales order is referred to as an Ord-BO. When the Ord-BO is created, the system will automatically recognize that Deferred Revenue was used on the original invoice and will mark the Ship Qty = 1 and the Invoice Qty = 0 (this is so the customer does not get charged twice).
When the Ord-BO is posted, the system will create the following G/L entries:
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Debit: $100 to the Deferred Revenue liability account to relieve the previous credit to this account.
Debit: To Cost of Goods Sold for the value of the sold items.
Credit: $100 to Sales Income.
Credit: To Inventory for the value of the sold items.
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If a backorder [that was created via Deferred Revenue] is voided in the Sales ➤ Backorders screen, the system will automatically issue a Credit Memo to the customer for the item.
Since no inventory was shipped, this credit memo will not affect inventory. When the Credit Memo is posted, the system will create the following G/L entries:
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Debit: $100 to the Deferred Revenue liability account to relieve the previous credit to this account.
Credit: The user will need to either create a refund receipt (if the original invoice was already paid) or charge the credit balance to A/R (if the original invoice was charged to A/R).
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Here’s the basic flow of a Deferred Revenue transaction:
- Enter an Invoice Qty for a Backordered item. Deferred Revenue liability is credited for the amount Invoiced minus the amount Shipped.
- Process the backordered item (issue and receive a PO, build the item, etc.) and generate a Sales Order to fill the Backorder.
- Process the new Sales Order (Ord-BO) and post. Deferred Revenue is debited and Sales Income is credited.