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Level 1

Recognizing revenue at fulfillment

Hello all. 

 

I have the following problem. My product has a long production time (2-3 weeks). But we demand upfront payment or 50% deposit from our clients. That means I receive a lot of payments on my bank account, which i need to book as current liabilities and then once the product is delivered to the client I create the invoice (dated on the delivery date) in order to record the revenue once the service has been rendered. But since qbo always takes the invoice creation date as the revenue recognition date, that also means I cannot really create invoices for my customers without correcting the invoice date once the order has been fulfilled. Does anyone have an easier work around to this?

 

Thanks so much

Solved
Best answer 3 weeks ago

Best Answers
Level 2

Re: Recognizing revenue at fulfillment

Hi Elena,

When you invoice upfront for products/services to be delivered later over time (possibly with payment received upfront too - though for accrual accounting and reports the payment transaction is irrelevant), then your company has generated a liability which gets cleared with the future delivery and its associated revenue recognition.  Accordingly, the deferred revenue account is a liability account.

If your company delivers services/products prior to invoicing the customer, then an asset account would be the correct type of account to use for the journal/transaction to recognize revenue ahead of invoicing - the pre-deliveries are considered assets.  If the invoice is raised mid-way during the delivery period, the contract amounts that are to be recognized post-invoicing should again go to a liability account.

Beyond consistency, using the correct type of account is also important when you conduct analysis that includes balance sheet numbers (e.g. ratios).

Anyway, I have seen sales receipts proposed as a solution for revrec on other threads in this forum so most likely some do it that way.  And your management and auditors may be OK with using an asset account instead.

If you do go that route, consider using a different asset account thereby cleanly separating transactions to it from other true assets.

If implementing journals instead of sales receipts, consider mirroring the invoice line description on each journal line description and include the invoice number too. That way a tie-back to the original invoice and line (with its details on quantity, unit price) etc. will be maintained.

Best regards,
Kamal.

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Level 2

Re: Recognizing revenue at fulfillment

Good info here. I hope this thread is still being watched.

 

Our approach here has been an Unearned Revenue liability account as others have noted. The problem is that Inventory items can't be pointed at an unearned revenue liability account (like a service or non-inventory item). To get around this we either have to 1) use only non-inventory items or 2) invoice to the revenue account, journal over to unearned inventory, then journal back to revenue when we ship the product. Neither seems to make sense.

 

Why can't we set up inventory items to go directly to unearned revenue liability account?

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8 Comments
Level 12

Re: Recognizing revenue at fulfillment

Anthony, it is going to depend on whether you keep your books on cash basis or accrual. You may have to ask your tax professional which way you have been filing. Cash basis is the simplest and used by most small businesses. In Cash Basis revenue (income) is recognized by the date of received payment and nothing else. An Invoice created today is not income to you until you post payments against it. Most of us simply create an invoice and collect payments against it. 50% down today is income today of 50% of the invoice total. Only under accrual accounting is income date the same as the invoice date.

 

But I can see your desire to not book income until after you have had expenses related to the income since you are production based. You don't want February income to reflect time and material costs that you may not incur until April.

 

So you are on the right track already, posting customer payments to current liabilities. You should do so, in my opinion, in the form of customer credit memo, which if you simply receive a payment against nothing a customer credit is created. You do not even have to use that credit to the next upcoming invoice you create - it just sits there but here is a tutorial on using an Estimate and properly receiving deposits against upcoming jobs.

http://www.quickbooksnow.com/customer-deposits/

 

Level 1

Re: Recognizing revenue at fulfillment

Hi John,

 

thanks, your answer and the article are super helpful.

We actually run on accrual basis, so the moment we fulfill an order counts. From testing QBO, I have only managed to make a sale count towards the month of the invoice date. So I can only create the invoice/sales receipt once I have shipped the product. However, it would be much simpler to create the "order" in QBO as soon as the customer places his order and just add a date at fulfillment which then attributes the sale/revenue to the month of fulfillment!

But I guess, I will input the customer when he orders, attribute a deposit to his account and then create the sales receipt when we have fulfilled it, turning his deposit into a sale.

 

Does that sound like the right way to go?

Level 2

Re: Recognizing revenue at fulfillment

Hi Anthony,

 

Invoicing the customer the day you confirm the sale is definitely the way to go - and even with accrual accounting.  By invoicing on the correct date your payment due dates, A/R aging etc will be consistent and accurate in QuickBooks.

 

Then use a revenue recognition process (manually or by using a revrec product - you can learn more here) to generate the correct PnL (and balance sheet) numbers. 

 

The mechanics of the revrec process after the invoice is raised, say for $300 in March, which you want to recognize in its entirety in April is:

                                                      Debit                                    Credit

Invoice raised    Mar 12, 18      A/R   300                             Revenue 300

Defer                   Mar 12, 18      Revenue 300                      Deferred Revenue 300

Recognize          Apr    3, 18      Deferred Revenue 300    Revenue 300

 

By entering the last two "revrec" manual journals you would have moved the revenue of 300 on the PnL from March - the invoice month - to April when you deliver the product.

 

One alternative setup to consider is to set the Income Account for the Product/Service that needs to be recognized in a different period directly to a "Deferred Revenue" account - a current liability account which holds "unearned revenue" until earned.  The revrec mechanics would then be

 

                                                      Debit                                     Credit

Invoice raised    Mar 12, 18      A/R   300                              Deferred Revenue 300

Recognize           Apr  3, 18      Deferred Revenue 300      Revenue 300

 

With this upfront setup change for the Product/Service, the invoice date stays the correct date and the number of revrec journals is reduced (the Defer journal is not needed, you'd just enter the Recognize manual journal).  It may also be the way to go when you do not know in advance the recognition date.  The tradeoff to consider while evaluating if this setup works for you is that it can complicate generating some reports.  And revrec validations can be more involved too.

 

While the revrec processes highlighted above can be done manually, an investment in a revrec tool may be worthwhile to consider too.  You can review the benefits of the revenue recognition tools on the app cards at the appcenter.

Level 2

Re: Recognizing revenue at fulfillment

@KamalVarma 

Thank you for your very detailed response. Books representation is very useful to understand the concept and not to miss anything behind. I have a related question to you: Would it be very wrong to set Deferred Revenue account as an Asset account (with negative effect) and not a Liability one?

The thing is, to recognize the revenue I want to use a Sales Receipt tool instead of a Journal, because the Sales Receipt tool would keep track of my product quantities, whereas the Journal would only track just the dollar amounts and not show up in Product Sales reports. The problem with Sales Receipt tool is that it only allows depositing to an assets account. Book-wise, it would look like this:

                                                                Debit                                        Credit

Invoice raised            Jun 01, 18       Acc. Receivables     $100       Def. Rev asset           $100

Invoice paid               Jul 01, 18        Bank                           $100      Acc Receivables        $100

Recog. (Sales Recpt.) Jul  30, 18     Def. Rev asset           $100      Revenue                     $100

 

Thank you,

Elena S.

Level 2

Re: Recognizing revenue at fulfillment

Hi Elena,

When you invoice upfront for products/services to be delivered later over time (possibly with payment received upfront too - though for accrual accounting and reports the payment transaction is irrelevant), then your company has generated a liability which gets cleared with the future delivery and its associated revenue recognition.  Accordingly, the deferred revenue account is a liability account.

If your company delivers services/products prior to invoicing the customer, then an asset account would be the correct type of account to use for the journal/transaction to recognize revenue ahead of invoicing - the pre-deliveries are considered assets.  If the invoice is raised mid-way during the delivery period, the contract amounts that are to be recognized post-invoicing should again go to a liability account.

Beyond consistency, using the correct type of account is also important when you conduct analysis that includes balance sheet numbers (e.g. ratios).

Anyway, I have seen sales receipts proposed as a solution for revrec on other threads in this forum so most likely some do it that way.  And your management and auditors may be OK with using an asset account instead.

If you do go that route, consider using a different asset account thereby cleanly separating transactions to it from other true assets.

If implementing journals instead of sales receipts, consider mirroring the invoice line description on each journal line description and include the invoice number too. That way a tie-back to the original invoice and line (with its details on quantity, unit price) etc. will be maintained.

Best regards,
Kamal.

View solution in original post

Level 2

Re: Recognizing revenue at fulfillment

@KamalVarma Thank you Kamal, you always give such detailed answers! Yes, you are right, having a liability as a contra asset account (of course separate from all other receivable accounts) would definitely create other troubles for me,  ratios is a good notice.

How about this solution then: after I am done with recognizing monthly sales via the Sales Receipts, I would create one simple journal which will move the total contra asset balance to the correct Liability account? This way I will always keep the contra asset account 0 for ratios to work, but still will be able to dive in the details of the Sales Receipts kept there and have my Product Sales reports pulling off the sold quantities.

                                                               Debit                                        Credit

Invoice raised            Jun 01, 18       Acc. Receivables     $100       Def. Rev asset           $100

Invoice paid               Jul 01, 18        Bank                           $100      Acc Receivables        $100

Recog. (Sales Recpt.) Jul  30, 18     Def. Rev asset           $100       Revenue                     $100

 

At the end of July, Def Rev asset has a monthly ending balance of  -300:

                                                                      Debit                                     Credit

Move balance (Journal)  Jul  30, 18      Def. Rev asset       $300      Def. Rev Liability        $300

Level 2

Re: Recognizing revenue at fulfillment

I shared this comment on a different post but thought it might be helpful to others to share it here:

 

I read quite a few posts/articles about 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.

 

Level 2

Re: Recognizing revenue at fulfillment

Good info here. I hope this thread is still being watched.

 

Our approach here has been an Unearned Revenue liability account as others have noted. The problem is that Inventory items can't be pointed at an unearned revenue liability account (like a service or non-inventory item). To get around this we either have to 1) use only non-inventory items or 2) invoice to the revenue account, journal over to unearned inventory, then journal back to revenue when we ship the product. Neither seems to make sense.

 

Why can't we set up inventory items to go directly to unearned revenue liability account?

View solution in original post

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