How do I recognize deferred revenue for client invoiced annually so it shows up in the P&L Report? Currently is being reported back to date of original annual invoice.

[ahyrell]

We have multiple clients that are invoiced annually.  When payment are received they are entered as sales receipt to deferred revenue.  As services are rendered monthly we do credit memo to the original invoice to realize the revenue.  However, there is something I"m missing.  The newly realized revenue doesn't show up on the P&L for credit memo date rather it shows up as the date of the original invoice.  What actions do I take to remedy this? 

[john-pero]

Re: Client invoiced annually.  Payment enter as sales receipt

Wrong to begin with. You created an Invoice, you must receive payment against the invoice or the invoice remains open. Unpaid invoices in cash basis accounting are not yet income until paid. So no matter what you do outside the invoice, if you do not "pay" the invoice you do not record the income item in the invoice.

to Def Rev.  Services monthly we do credit memo to original Inv.  Doesn't show on P&L  for credit memo date?

Correct action by design, I believe, and are you clearing Deferred Revenue with the credit memo each month?  Only a payment on the invoice will record income as of the date of the payment. Credit memos will not do that. 

What does services monthly even mean when you have an annual invoice? Yes, you billed the customer in advance for a year's worth of services not yet performed, however you , as described, do not receive any money until the year is over? Where is your payment in this? Up front? THAT is a different animal altogether

My recommendation is to use an Estimate and Progress Billing month by month. Go ahead and receive $1200 in advance for first invoice of $100 (or no invoice until service is performed) and you will automatically create  a customer credit of everything paid ahead. Then month by month create a progress invoice and apply appropriate amount of credit memo as a payment. You can do that, receive payment from credit memo, right in the Invoice.

Alternately consider this. You can Receive Payment with or without an Invoice. Go ahead and create the annual Invoice, Receive payment but do not select the invoice. The customer credit memo will be created for the full payment. Monthly go into the Invoice to receive payment (or Receive Payment button), apply just the monthly amount of the c.m. At that point the c.m. should record that much income

Are you looking at your P&L as cash basis or accrual? Technically by issuing invoices you are either accrual or can use a hybrid method allowed by the IRS

[Malcolm Ziman]

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@ahyrell wrote:

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"When payment are received they are entered as sales receipt to deferred revenue. "

So the linked income account of the Item is deferred revenue. What account type is this? C/liab?

"As services are rendered monthly we do credit memo to the original invoice to realize the revenue. "

c/memo does not create revenue; it reduces it. And it creates a negative AR balance, which s/be zero. There is no AR

You can create a Journal Entry to realize the revenue; debit deferred revenue C/liab, credit income

[john-pero]

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@Malcolm Ziman wrote:

You can create a Journal Entry to realize the revenue; debit deferred revenue C/liab, credit income

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Yes you can, but you will get your hand slapped by @qbteachmt for bypassing cash vs accrual and being unable to track by name. If these shortcomings are fine then go right ahead

[ahyrell]

Thank you for the help it will definitely me get closer to fixing this.

When payment are received they are entered as sales receipt to deferred revenue.

So the linked income account of the Item is deferred revenue. What account type is this? C/liab? 

• Correct, deferred revenue is set as a liability.

"As services are rendered monthly we do credit memo to the original invoice to realize the revenue. "  c/memo does not create revenue; it reduces it. And it creates a negative AR balance, which s/be zero. There is no AR

• I probably explained that poorly. I was using the Credit Memo to reduce the Deferred Revenue
• Then applying that same credit memo as a payment to the original invoice (which has an item linked to income account) to reduce the invoice balance.

 You created an Invoice, you must receive payment against the invoice or the invoice remains open. Unpaid invoices in cash basis accounting are not yet income until paid. So no matter what you do outside the invoice, if you do not "pay" the invoice you do not record the income item in the invoice.

• Correct, which is why I was applying the Credit Memo to the original invoice as a payment

 Are you clearing Deferred Revenue with the credit memo each month?   

• Yes, we are clearing Deferred Revenue with the credit memo each month

Only a payment on the invoice will record income as of the date of the payment. Credit memos will not do that. 

• That is why was applying the Credit Memo to the original invoice as a payment, however, I thought that the amount would show up in the P&L for the date of that payment. If I understand correct, I see that the payment is technically $0 which is probably why the amount then shows up in the P&L as the date of original invoice. Which is what I am trying to fix.

What does services monthly even mean when you have an annual invoice? Yes, you billed the customer in advance for a year's worth of services not yet performed, however you , as described, do not receive any money until the year is over?

• Sorry, I probably didn’t explain that part well. Clients are paying for an entire year up front for services to be provided on a monthly basis.

 Where is your payment in this? Up front? THAT is a different animal altogether

• Yes, our payment is upfront or a prepayment for services not yet provided.

My recommendation is to use an Estimate and Progress Billing month by month.

• Do clients typically pay from an estimate though? I’ve only ever been asked specifically for invoices.
• If I do need an invoice for the client to pay, once created, I wouldn’t want to delete something I already sent to a client would I?

We are looking at our P&L as accrual which is why I was hoping to see the credit memo’s/payments applied on a monthly basis for the date I processed those rather than attached to the original invoice.

I am going to test out both of your suggested options to see if one of them will work for us!  What I failed to mention in my original post is that we are using Quickbooks Online which I know is far more limited than the Desktop version.  Just curious if knowing this would change any of your suggestions.

[john-pero]

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@ahyrell wrote:

We are looking at our P&L as accrual which is why I was hoping to see the credit memo’s/payments applied on a monthly basis for the date I processed those rather than attached to the original invoice.

I am going to test out both of your suggested options to see if one of them will work for us!  What I failed to mention in my original post is that we are using Quickbooks Online which I know is far more limited than the Desktop version.  Just curious if knowing this would change any of your suggestions.

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Aha! Accrual income is 100% on the invoice date no matter when or how payments are applied. That is bookkeeping you cannot change. Your invoice for service item on 1/1 for 12 months of service is recorded as income on 1/1 EVEN IF YOU NEVER GET PAID! That is how accrual works, you cannot change when the income happens.

Your product/service on the initial invoice should itself reflect the deferred revenue liability and not the actual service. It can say differently to the customer but internally it cannot post to the actual service income. And customers generally will not pay on an Estimate although if you get them to it is a plus.

So try this. Invoice in total for behind the scenes Deferred Revenue.

Monthly create your Sales Receipts BUT on the sales receipt will be the real service income and a minus deferred revenue posting item thus cancelling each other as a net zero amount sales receipt. Income will post on date of sales receipt and you will not have to mess with credit memos

[Malcolm Ziman]

@john-pero

"Your invoice for service item on 1/1 for 12 months of service is recorded as income on 1/1  "

No No. With the accrual method income is raised when goods or services are DELIVERED, not when it happens to be invoiced; usually it's the same date. The date of  the invoice (using an item linked to an income account) is always when goods or services are DELIVERED.  In this case the item is NOT  linked to an income account, so the invoice does not create income, and the date is irrelevant.

[john-pero]

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@Malcolm Ziman wrote:

@john-pero

"Your invoice for service item on 1/1 for 12 months of service is recorded as income on 1/1  "

No No. With the accrual method income is raised when goods or services are DELIVERED, not when it happens to be invoiced; usually it's the same date. The date of  the invoice (using an item linked to an income account) is always when goods or services are DELIVERED.  In this case the item is NOT  linked to an income account, so the invoice does not create income, and the date is irrelevant.

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That is precisely why I said create the invoice posting to Deferred Revenue (but label it something different, like Annual Service even though it isn't so you don't freak out the customers)

But I was explaining what happens regarding differences between cash and accrual entirely separate from delivery of services. Let's look at the opposite side, cash basis. you pay me ahead of service, delivery date be danged I must post income as of date money is in my control. In cash basis there is no deferred anything

[Malcolm Ziman]

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@john-pero wrote:

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Yes you can, but you can, but you will get your hand slapped by @qbteachmt 

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LOL

[ahyrell]

Thanks!  That seems like a plausible solution so I'll try that today to see how it works out!