Deferred revenue or Income which is sometimes also referred to as unearned income relates to payments received from a customer in advance for services or goods which they have yet to receive or be delivered.
What is Deferred Income
Keeping track of deposits paid by customers and knowing when these should hit your accounts can be a tricky business. Large corporations down to SME’s and freelancers will experience this issue and any business that deals in payments in advance or on account would normally be expected to know exactly how much has been received as deferred revenue so, let’s explain this is in a bit more detail and see how it should be handled within your accounting system.
Any customer that pays in advance, creating a prepayment, on account or stage payments should be treated as a liability within your balance sheet until the work has been completed or the stage that you’ve charged them for has been completed as prior to this, if it turns out you cannot fulfil the order the funds may need to be returned. So, this revenue is classified on the company’s balance sheet as a liability and not as an asset.
It could that your business provides Subscriptions based on annual or quarterly invoicing so, if a sales invoice is raised for a twelve month subscription it stands to reason that you would want this spread across your profit and loss account accordingly so as to not inflate one months trading but have the sales amount showing when the costs are also showing giving you a more realistic picture of your accounts.
Having the correct tools for the job
To handle this type of business it makes sense to have an accounting system that gives you the ability to create your sales invoices based on subscriptions, whether that’s monthly, quarterly or annually, or at least offer the ability the phase your service/sales invoices or, in an ideal world do both.
Many cloud accounting systems offer integrations or apps that enable you to create your sales based on future sales but how many fully integrate with your existing accounts package?…when considering which system is suitable for you and your business this is one area that you need to be certain of. Having the ability to run your invoices, phase the sales accordingly throughout the year and have reports that detail all of this activity is paramount and having the ability to access your data at all times wherever you happen to be is no longer a luxury more an necessity and it’s only by using a cloud accounting systems that this can be achieved.
Reviso Online Accounting offer both types of functionality, Subscriptions and Prepayments/accruals which fully integrate with the core accounting package providing you with excellent real time accurate reporting.