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Level 1

Record an invoice through deferred revenue

We are an interior design company and we charge upfront for our services. We should recognize the revenue when the service is provided/goods are delivered. We issue invoices with the full amount, and receive payments soon after. The lead time between the payment and delivery is about 4-5 months. We use accrual accounting. 
I would like to record
- when we invoice
DR: account receivable
CR: deferred revenue 

- when we receive the payment

DR: Cash
CR: Accounts receivable
- when the revenue is realized
DR: deferred revenue

CR: income

 

It seems quite straight forward and still Quickbooks doesn't seem to allow me to record an invoice in relation to deferred revenue. I've read some very complicated approaches to this. Is it any easy way to do it?

 

Thank you,

Ana

14 Comments
Moderator

Re: Record an invoice through deferred revenue

You've to the right place for help with QuickBooks, CPS - Ana.

Let me help you go over to your invoices and have those payments recorded properly.

 

QuickBooks will allow you to record these transactions once the account used for your Products and Services is deferred revenue or an asset account. This way, you'll have these transactions recorded properly.

 

So when you create an invoice, the transaction will look like this:

 

 

When you received the payment:

 

 

So when revenue is realized, you'll need to enter a journal entry for this.

 

Here's how:

  1. Select the Plus icon (+).
  2. Under Other, select Journal Entry.
  3. Enter the transaction date in the Journal date field.
  4. (Optional) Enter a Journal number to help identify the transaction in reports.
  5. On the first distribution line, in the Accounts field, enter any account listed in the Chart of Accounts.
  6. Enter the transaction amount in the Debits or Credits column.
  7. Specify a customer, vendor, or employee associated with the line, if any, in the Namefield.
    Note: QuickBooks Online Plus and Advanced users - When the Classes and Locations feature is turned on, additional fields for Class and Location appears.
  8. Continue to enter distribution lines until the sum of the Debit column entries equals the sum of the Credit column entries.
  9. (Optional) Select Make recurring to set a recurring journal schedule.
  10. Select Save.

You can get more details in this article: https://quickbooks.intuit.com/community/Help-Articles/Create-a-journal-entry/m-p/192925.

 

You know where to find me if you need more help in recording your invoices through deferred revenue. I'll be around to help.

Level 15

Re: Record an invoice through deferred revenue

@CPS - Ana 

 

nothing you are asking for is beyond the capabilities of QB.

In QB the item you use determines the account it posts to, so create a service item for the prepayment and select the deferred revenue liability account (it is not an asset account as intuit mentioned)

 

Using that on the invoice posts to deferred revenue (cr) and A/R (db)

 

receive payment against the invoice, that posts to A/R (cr) and undeposited funds (db), then deposit to the bank

 

Final invoice, list the items sold, then list the deferred revenue item with a qty of negative one and the amount received. The customer pays the balance if any.  that clears the deferred revenue liability account (db) and pays the invoice (income - cr)

 

Journal entries should be the exception when using QB, they often do not work as you think they should, and when you use inventory type items they never work for inventory. It is much better to use the forms on the home page the way QB is designed to be used. Journal entries also bypass accrual/cash reporting, and will not show on many reports.

Level 1

Re: Record an invoice through deferred revenue - Dear Ana, Did you find an easier way to do this? It's my same predicament.Thank you,


@CPS - Ana wrote:

We are an interior design company and we charge upfront for our services. We should recognize the revenue when the service is provided/goods are delivered. We issue invoices with the full amount, and receive payments soon after. The lead time between the payment and delivery is about 4-5 months. We use accrual accounting. 
I would like to record
- when we invoice
DR: account receivable
CR: deferred revenue 

- when we receive the payment

DR: Cash
CR: Accounts receivable
- when the revenue is realized
DR: deferred revenue

CR: income

 

It seems quite straight forward and still Quickbooks doesn't seem to allow me to record an invoice in relation to deferred revenue. I've read some very complicated approaches to this. Is it any easy way to do it?

 

Thank you,

Ana



@CPS - Ana wrote:

We are an interior design company and we charge upfront for our services. We should recognize the revenue when the service is provided/goods are delivered. We issue invoices with the full amount, and receive payments soon after. The lead time between the payment and delivery is about 4-5 months. We use accrual accounting. 
I would like to record
- when we invoice
DR: account receivable
CR: deferred revenue 

- when we receive the payment

DR: Cash
CR: Accounts receivable
- when the revenue is realized
DR: deferred revenue

CR: income

 

It seems quite straight forward and still Quickbooks doesn't seem to allow me to record an invoice in relation to deferred revenue. I've read some very complicated approaches to this. Is it any easy way to do it?

 

Thank you,

Ana



@CPS - Ana wrote:

We are an interior design company and we charge upfront for our services. We should recognize the revenue when the service is provided/goods are delivered. We issue invoices with the full amount, and receive payments soon after. The lead time between the payment and delivery is about 4-5 months. We use accrual accounting. 
I would like to record
- when we invoice
DR: account receivable
CR: deferred revenue 

- when we receive the payment

DR: Cash
CR: Accounts receivable
- when the revenue is realized
DR: deferred revenue

CR: income

 

It seems quite straight forward and still Quickbooks doesn't seem to allow me to record an invoice in relation to deferred revenue. I've read some very complicated approaches to this. Is it any easy way to do it?

 

Thank you,

Ana


 

Level 12

Re: Record an invoice through deferred revenue - Dear Ana, Did you find an easier way to do this? It's my same predicament.Thank you,

@Gee4  did you not read the instructional post from @Rustler ??? Read it - read it again - and again. His description of what and how to treat deferred revenue on invoices is correct in every way

Level 1

Re: Record an invoice through deferred revenue - Hi. Thanks for your note. Based on @Rustler quote: " so create a service item for the prepayment" and "select the deferred revenue liability" account". How do you do it? I'm new to QBO and I see that when i create an invoice, it automatically sends it to revenue. I tried to change it to deferred revenue. No can do. Thanks.

 
Level 1

Re: Record an invoice through deferred revenue - Hi. Thanks for your note. Based on @Rustler quote: " so create a service item for the prepayment" and "select the deferred revenue liability" account". How do you do it? I'm new to QBO and I see that when i create an invoice, it automatically sends it to revenue. I tried to change it to deferred revenue. No can do. Thanks.

Go to the Gear Icon top right, click on lists, then Product/services.  Select the item in question, edit and then you can change the account number.  However, We do a similar thing as you describe, take a deposit or prepayment upfront for a service to be performed later in the year.  I use a "Deposit" item (product/service) on the first invoice, set to deferred revenue.  Then when I want to recognize the actual service, I invoice the actual service using the actual product/service item, then negative the same deposit item that I started with.  This creates a zero invoice but books the revenue.

Level 2

Re: Record an invoice through deferred revenue

This is really helpful @Rustler! I'm having a bit of trouble though picturing what this would look like.

To clarify: 

  • When creating the invoice, use the deferred revenue liability account
  • Once you've received payment, edit the invoice to add the correct destination account as a separate line item, and change the item quantity for the first line item (the item listing the deferred revenue account) to -1. 

Did I understand this correctly? 

Also, will this allow you put the revenue, once it's received, in a different fiscal year? For example, if I'm writing the invoice in May but I want to record the revenue in the subsequent fiscal year starting in July, is there a way to do this without changing the date on the invoice itself?

 

Thank you!

Level 15

Re: Record an invoice through deferred revenue


@Karen_from_Finance wrote:

This is really helpful @Rustler! I'm having a bit of trouble though picturing what this would look like.

To clarify: 

  • When creating the invoice, use the deferred revenue liability account

Use an item on the invoice that links to the deferred revenue liability account

 

  • Once you've received payment, edit the invoice to add the correct destination account as a separate line item, and change the item quantity for the first line item (the item listing the deferred revenue account) to -1. 

No, you do not edit anything. The money receive is deposited in the bank, and the deferred revenue liability account show that you have someones money and you owe it.

 

Then you do a new final invoice, listing the items and services being sold.
the last line on the invoice you use that deferred revenue item, qty negative one, and the total amount of deferred revenue you received.
the customer pays the balance if any

 

the negative one on that item, moved the money out of the liability account paying all or most of the charges, and it becomes income at that point in time.

 

Also, will this allow you put the revenue, once it's received, in a different fiscal year? For example, if I'm writing the invoice in May but I want to record the revenue in the subsequent fiscal year starting in July, is there a way to do this without changing the date on the invoice itself?

 

The new invoice does that for you

 

Sorry about the bold face, it was the only way to make my response stand out in the post


 

Level 2

Re: Record an invoice through deferred revenue

Very clear, thank you so much for the reply!

Level 2

Re: Record an invoice through deferred revenue

I read through this entire page a couple of times and had a difficult time understanding exactly how to do this, so after meeting with my CPA, I'm sharing how I'm doing this for my business (I bill most of my clients ahead of time and need to track earned vs unearned revenue).

 

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

 

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.

 

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
QuickBooks Team

Re: Record an invoice through deferred revenue

Hello there, @erikhansen.

 

I appreciate you for sharing very detailed information on how you resolved this issue. It will surely help other users who encounter the same problem.

 

Wishing you and your business continued success. 

Level 1

Re: Record an invoice through deferred revenue

Hello - 
In order to book an invoice that debits deferred revenue and credits revenue, as you suggest (which I love by the way), how do you set up the GL account properly so that it functions as a receivable account, but actually maps to a liability? 

Level 1

Re: Record an invoice through deferred revenue

This example was very helpful, thank you!

Level 3

Re: Record an invoice through deferred revenue

@Rustler wrote:

 


Journal entries should be the exception when using QB, they often do not work as you think they should, and when you use inventory type items they never work for inventory. It is much better to use the forms on the home page the way QB is designed to be used. Journal entries also bypass accrual/cash reporting, and will not show on many reports.

That should be displayed in big flashing red letters the first 50 or so times a new user logs into QBO. :-) I wish I'd heard it before having to learn the hard way how quirky J/Es can be (even just comparing QBO versus QB Desktop).

 

Thomas

 

P.S. Intuit support, that was a joke. QBO already throws up too many new-user popups for my liking. 

 

 

 

 

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