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Anonymous
Not applicable

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

We are a SaaS company and some customers pay us yearly. We are under the accrual based accounting method, so we need to book those as they are earned, each month, even though the customer has already paid us in full.

How we do this is by creating a "Deferred Revenue" list item on the charts of accounts and a "Service" product that is marked as deferred revenue. We then book the full year's service payment as deferred revenue, and each month, I've been instructed to do this:

"Select "Create Invoices," and then select a customer from the selection box. Choose the monthly subscription charge. Add another item, and then choose the monthly prepayment charge to create an invoice that totals to zero and that transfers money from the liability account to the income account."

I am confused on this step and have a few questions, after calling quickbooks support they didn't have a clear answer:

1. I don't know what to put to transfer money from the liability account to the income account, although I understand what's going on, I don't know exactly what I need to do. Do we need to add monthly subscription charge as an additional "Service" item and mark it as "sales from service income"? And second, what do we put for the monthly prepayment charge? What item do I select and how does this connect back to the liability? I would love to see a screenshot of an example if anyone has one.

2. We have lots of yearly service payments from the past year we need to correct. Is there any knowledge of doing this at scale? Should I create a whole new "Service" item with the corrected type to accomplish this? Otherwise, if i bulk update all the old ones, it'll impact transactions from before the 2017 tax year. 

Solved
Best answer October 15, 2018

Best Answers
Highlighted
Level 15

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Item 1.

I would make an Other Charge type item and name it Deferred Revenue; link it to Liability.

You make a Service item for the things you really sell, linked to Income.

You use the Deferred Revenue item on a Sales Receipt or invoice, for the Lump Payment you want to allocate into different fiscal periods.

You Invoice for the Actual Charged item and date(s) that apply, for Sales reporting.

You use the Deferred Revenue item on a Credit Memo for each amount and date you apply it to an Invoice.

You create a custom transaction detail report on the Liability account and set it to total by Name. For a name with 0 balance, you Reconcile this account to an ending balance of 0, clearing only the transactions from each side in the reconciliation screen that brings a name to 0 balance.

Make two versions of this report. One is titled All Activities. The other is filtered on Cleared Status = No, and titled Current Balances.

You also can run Sales reports and Item-based reports. In this case, the Job- and item-based reports, if you see it is filtered on Accounts = Income/Expense, remove that filter entirely, to see income and the clearing of the Deferred revenue, as well; or make a report on Deferred Revenue account/item, only.

And this is why I like to do it like this:

Deferred Revenue Received

Deferred Revenue Applied

These two Other Charge Items are subitems of a Common Parent. That makes for nice reporting :)


For your item 2: If you intend to fix for Current Fiscal year, then you would put the Original Sale item in a credit memo (to review the balance that is supposed to be deferred) and the Deferral item on an invoice for the Amount you want to remove from income to Defer now. Now you Reversed that prior income, to Deferral. Then, start invoicing for Services income and put Deferral on a Credit Memo, to clear the invoices.



I like to run Sales by Customer Summary, columns by item type, and Other Charge is a different column that Services.

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20 Comments 20
Highlighted
Level 15

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Item 1.

I would make an Other Charge type item and name it Deferred Revenue; link it to Liability.

You make a Service item for the things you really sell, linked to Income.

You use the Deferred Revenue item on a Sales Receipt or invoice, for the Lump Payment you want to allocate into different fiscal periods.

You Invoice for the Actual Charged item and date(s) that apply, for Sales reporting.

You use the Deferred Revenue item on a Credit Memo for each amount and date you apply it to an Invoice.

You create a custom transaction detail report on the Liability account and set it to total by Name. For a name with 0 balance, you Reconcile this account to an ending balance of 0, clearing only the transactions from each side in the reconciliation screen that brings a name to 0 balance.

Make two versions of this report. One is titled All Activities. The other is filtered on Cleared Status = No, and titled Current Balances.

You also can run Sales reports and Item-based reports. In this case, the Job- and item-based reports, if you see it is filtered on Accounts = Income/Expense, remove that filter entirely, to see income and the clearing of the Deferred revenue, as well; or make a report on Deferred Revenue account/item, only.

And this is why I like to do it like this:

Deferred Revenue Received

Deferred Revenue Applied

These two Other Charge Items are subitems of a Common Parent. That makes for nice reporting :)


For your item 2: If you intend to fix for Current Fiscal year, then you would put the Original Sale item in a credit memo (to review the balance that is supposed to be deferred) and the Deferral item on an invoice for the Amount you want to remove from income to Defer now. Now you Reversed that prior income, to Deferral. Then, start invoicing for Services income and put Deferral on a Credit Memo, to clear the invoices.



I like to run Sales by Customer Summary, columns by item type, and Other Charge is a different column that Services.

View solution in original post

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Anonymous
Not applicable

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Would you do a call/hourly consulting for this? We are still a little unclear and would love to talk.
Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Collin, I'd also recommend looking at solutions in the marketplace like SaaSOptics (full disclose I am an employee). But there are solutions available that integration with Quickbooks in QB Marketplace that will handle this scenario for you and extend the functionality of Quickbooks for use with a SaaS based business.
Highlighted
Level 15

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

"1. I don't know what to put to transfer money from the liability account to the income account"

It's not Money. You are holding the money in banking, already. This is Value.

Think of everything as Charges. You charged them for the Deferred income = your liability. You Charge them for the actual service. You "credit back" that liability charge, but instead of a refund, you apply it to the charge for the actual service. That's how you "turn liability into income." A Landlord does the same thing: You move out owing Rent, and they still have your security deposit. You Apply the security deposit to the Rent Invoice.

The Sale for the service is the same sale to me, whether I am Paying by cash, check or Prepayment that you required me to make. You are Applying my prepayment on my behalf, in lieu of making me send More money.

"We are still a little unclear and would love to talk."

This is a text-based Peer user internet forum. This is not Live Chat with Intuit support. If you need to hire someone, I recommend a Pro Advisor:

http://proadvisor.intuit.com/app/accountant/search?searchId=amanda-hritz-2



Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

I may have an easier solution.  Why don't you just create an invoice for the full value of the annual contract, use an 'invoice item' that links it to the Deferred Revenue liability, and then make a journal entry each month debiting the Deferred Revenue liability and crediting the appropriate revenue account for the monthly revenue recognition amount.    

Highlighted
Level 15

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

@Gkhalsa

 

This is completely bypassing sale and customers: "and then make a journal entry each month debiting the Deferred Revenue liability and crediting the appropriate revenue account for the monthly revenue recognition amount."

 

That's why you Avoid JE. You avoid it for anything with Names, for AP, AR, for QB  Sales, QB inventory, QB Sales taxes, and QB Payroll. And you just bypassed Cash vs Accrual Basis reporting.

 

With your method, there is no Customer reporting of sales, and no Sales reporting, because you made no Sales transaction at all.

 

It is Brute Force Accounting and not really Easier, but Sidestepping every reason to pay for and own and use any QB Program.

 

It's very easy to Test Drive any concept using the sample file, try seeing your impact in that data file, look at the customer reporting, sales, etc, and run financial reports on cash vs accrual basis, to see how wrong that concept would be, for using QB. It's fine for using green ledger paper. The Concept is fine, but the Tool is wrong.

 

QB is an Interface = tools for managing the data. Don't fall back to debit-credit, because you just bypassed everything else.

Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

The sales transaction with all customer data was made with the first invoice entry I mentioned.  The monthly JE is only to post the recognized revenue.  

Highlighted
Level 15

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

This is wrong for the accounting, because Liability isn't Sales for an entity allowed to hold liability and you are not addressing if there is Sales taxes. You just bypassed all of it.

 

Intuit even gives proper guidance:

QB Desktop Prepayments

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Level 2

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Hello, I am currently working on a similar issue and looking for some advice.

1)We issue the annual invoice to the client with the correct product linked to income.
2)When they pay, we process the full annual payment to a Deferred Revenue item on the Sales Receipt.
3)Then when services are rendered each month, I create a Credit Memo using the deferred revenue item and apply that as a payment to the original annual invoice.   

 

My issue though is that on our P&L the recognized revenue doesn't show up for the month of the Credit Memo I just did rather it shows up the date of the original invoice.  So over the course of the year all of the revenue on our P&L is recognized the date of the original invoice.  

Can you help figure out what I'm doing wrong?  

 

I'm not sure what you meant in your post "You Invoice for the Actual Charged item and date(s) that apply, for Sales reporting."    Is this separate of the annual invoice I would have issued the client?

 

If I create an invoice for each month then how do I handle the original invoice that the client would have received?

 

 

Highlighted
Level 15

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

I would use an Estimate for the Total Scope. Then, invoice Monthly.

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Level 2

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Thank you, I will look into that! 

 

In your experience do clients typically pay from an estimate?  Most of mine ask for an invoice to prepay for the year.  Once an invoice is sent to the client for tracking purposes I wouldn't want to then delete it in case it needs to be referenced or reviewed in the future.   So wouldn't that still leave me with an open invoice to deal with?

 

 

Highlighted
Level 15

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

You have Two Different things, here: "In your experience do clients typically pay from an estimate?"

 

It you Title it something, such as Pro Forma Invoice.

 

"Most of mine ask for an invoice to prepay for the year."

 

Only you and your CPA know if the one invoice for the entire year is the right way to handle this.

 

"Once an invoice is sent to the client for tracking purposes I wouldn't want to then delete it"

 

You NEVER delete anything like this. It makes no sense to make entries just to delete them, and that would be changing your Financial History, sales, etc. Never do that.

 

"in case it needs to be referenced or reviewed in the future.   So wouldn't that still leave me with an open invoice to deal with?"

 

You need to understand each step and what it means to your accounting.

 

I can send you an invoice for a Prepayment item; that One Invoice is the date of the sale and ha a due date. it isn't "for monthly payments all year." It is This Time; then, there will be Next Time. And you need to know if you are allowed to hold prepayments as liability or they are Income for you.

 

You already told us you Invoice for the year, and use Sales Receipt to handle the prepayment. The invoice sits there all year? And you apply the prepayment to it using Credit Memo.

 

So, you need to know when you are supposed to report this as income; a Cash Basis entity got it at the time of the prepayment. A Law firm or Trust Bank requirement entity also cannot use Credit memos like that, to handle the movement of prepayment liability.

 

All of these are your Tools. You need to use them to meet your Accounting requirements.

Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

If the original invoice was a debit to a/r and credit to d/r and the receipt of the payment was a debit to cash and a credit to a/r, that leaves the a/r balance at zero. Then when the credit memo is applied as a debit to d/r, it also gets applied to a/r as a credit and results in a negative a/r balance.

 

The customer name shows up in the deferred revenue account, but how can the credit memo be set up to credit the appropriate revenue account instead of accounts receivable?

Highlighted
QuickBooks Team

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Hello there, @ceverett.

 

As of this time, there isn't a way to set another revenue account in the credit side aside of A/R. 

 

Since credit memo is to give your customer a credit, A/R account will always show on the credit side.

 

As a workaround, you can create a journal entry to balance your A/R account. Here's how:

 

  1. Click the Plus (+) icon.
  2. Select Journal Entry.
  3. On the first row under Account column, choose the appropriate account and enter the amount under the Credits column.
  4. On the second row, choose Account Receivable and the amount under the Debits column.
  5. Select the customer's name on the far right under the Name column.
  6. Click Save and close.

But make sure to consult your accountant first before trying this option. He/she may add suggestions based on what's more suitable for your business and to your books.

 

Don't hesitate to leave a comment below if you have additional questions. Have a good day!

Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Hi,

 

I'm trying to follow the explanation above but I got lost in the middle.  Could you perhaps explain it again using number steps (1st to this, 2nd this, 3rd this, etc)?  I've got the prepaid money properly into a deferred revenue account.  Now am trying to figure out how to move it month by month to income while reducing the deferred revenue amount.  I tried a credit memo applied to the customer's invoice but that didn't work because the invoice is closed/paid (we already received the money and it is deposited in the bank).  QB wouldn't let me apply the credit to the memo since the invoice was closed.  Thanks for any help on this.

Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

You Said: "You use the Deferred Revenue item on a Sales Receipt or invoice, for the Lump Payment you want to allocate into different fiscal periods....You Invoice for the Actual Charged item and date(s) that apply, for Sales reporting."

 

But Won't these transactions both create an AR amount for the customer? I'm not clear on how this doesn't double the amount of AR vs. what is expected in payment. I'm clearly missing something, as you seem extremely knowledgeable on this!

Highlighted
Level 2

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

I found several discussions on this forum about this topic, but never found anyone posting detailed instructions on how to do this in Quickbooks. My example scenario doesn't exactly answer the question, but the principle is the same.

 

In this scenario, you're a software developer whose clients pay you $5,000 "blocks" at a time and you bill against those blocks. You need a way to invoice and receive payment, without showing that payment as having been "earned" until you actually log the time against it each month.

 

I found that experimenting in a sandbox Quickbooks account helped me figure this out.

 

Steps I took:

 

Initial Setup:

  1. Click "Accounting > Chart of Accounts"
    1. Click "New"
    2. Select "Other Current Liabilities" and "Other Current Liabilities" and then name the account "Unearned Revenue"
    3. Click "Save and Close"
  2. Click "Sales > Products and Services"
    1. At this point you can either edit some of your existing Services or create new Services to act as "prepaid" Services. In my case, I created a few "prepaid" Services like with these names:

      - Software Support Plan
      - Software Development (I used the category of "PP" to remind myself it was a "prepaid" service—I didn't use "Prepaid" as I didn't want that term visible to my customers)

      Let's walk through how to do this:
      1. Click "New"
      2. Click "Service"
      3. Enter a name like "Monthly Support" and change the "Income Account" to "Unearned Revenue".

      4. Click "Save and Close"
    2. Now, we'll create an Service that will track the "Earned Revenue"…
    3. Click "New"
    4. Click "Service"
    5. Enter a name like "Earned Revenue" and change the "Income Account" to something that appropriately represents the type of revenue it is. For example "Services". Your customers most likely won't seeing the name of this Service (unless you send them the $0 invoices, as I mention later in this post).

Now that we've completed the initial setup, let's look at what it will look like to run this process on an ongoing basis…

 

Ongoing process:

 

  1. Click "Sales > Invoices". Click "New invoice".
    1. Enter all of the details you would normally on an invoice. Select the "Software Support Plan" Service you created earlier, enter your hours and hourly rate.
    2. Click "Save and Send". 
    3. Once the client pays you, mark the Invoice as having been paid.
    4. At this point, if you look at a "Balance Sheet" report, you'll see that the $5,000 amount is showing as a Liability (which is what you want since you haven't earned it yet):
  2. Now, let's assume a month has passed and you've worked 35 hours for this client…

    Click "Sales > Invoices". Click "New invoice".
    1. For the first line in the invoice, enter "Software Support Plan". Enter the number of hours you worked as a negative amount (this will subtract the hours from your "Unearned Revenue" liability account). 
    2. Enter a second line with "Earned Revenue" as the service. Enter the number of hours you worked (as a positive amount). The invoice total should now be $0. 
    3. You can now "Save" this invoice. Or, if you want your client to see a record of how many hours you have worked, you could send this $0 invoice to them by clicking "Save and Send". Although I personally prefer to create a centralized spreadsheet where my client can see this information, as a $0 invoice is not the cleanest way to present this information.


    4. Once you save the invoice, money will be moved out of your "Unearned Revenue" Account into whatever Account you linked to your "Earned Revenue" Service. This should be reflected on your Balance Sheet and Profit & Loss reports.

Hopefully this helps clear up any confusion for people like me without an accounting background.

 

Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Set up a template to automate recurring journal entries over the period of performance.  Never touch the transaction again.

Highlighted
Level 1

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

I have a similar question...The company I work with used accural accounting and invoices annually for a 12 month subscription.  I need to spread the revenue out over the 12 months.  I have been using items to link my Annual Subscription Income to my Deferred Revenue Account.  Once the invoice has been generated, I use a report to see which invoice needs the deferred revenue spread out by creating the 12 Journal Entries, by duplicating & changing the date-I include the Customer Name in each JE and reference the Invoice # for easy tracking (one for each month).  Please tell me if there is an easier way to track this type of transaction....

 

Highlighted
QuickBooks Team

How to account for SaaS yearly upfront payments using deferred revenue in quickbooks online

Hi there,  @lmlconsulting

 

Let me share some information regarding these yearly upfront payments in QuickBooks Online.

 

You can create a journal entry to report this transaction. However, using this method needs the assistance of an accounting professional for the accounts you need to use. Also, your accountant can help and guide on which account to debit and credit.

 

To create a journal entry, here's how:

 

  1. Select + New.
  2. Select Journal entry. Or, if you're in Business view, switch to Accountant view first. Then come back to these steps.
  3. Fill out the fields to create your journal entry.
  4. Select Save and new or Save and close.

 

Also, I recommend visiting the links below. It provides more information about the journal entry process as well as other reasons to use them:

 

 

I'm here anytime you have other concerns. Stay safe always. Take care.

                                                                                                                   

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