Deferred Revenue Set Up

This Help File Page was last Modified on 02/10/2019

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Deferred Revenue Set Up

This Help File Page was last Modified on 02/10/2019

An Overview of Earned and Deferred Revenue Tracking

Earned and Deferred Revenue calculations is a somewhat complex accounting concept (one of many that are designed to ensure full employment for accountants and tax attorneys) but can be summarized as follows:

Within the context of the accounting procedures that most of us are familiar, every (Sales) Invoice that is issued would normally be considered "earned" when it is created.

As an example: when your Company bills some person or business for something they've purchased, they have already received those parts, services, or repairs from your Company (e.g., the completion of a Work Order, an installation of a new System, etc.).

However, when billing for Recurring Revenue (e.g., Monitoring Services for the next Quarter, the upcoming year's Service Contract, next month's Lease Payment), those Sales Invoices are almost never fully "earned" when they are "billed" to the Subscriber.

This is because those Invoices for Recurring Services (e.g., Monitoring Fees, Service Contracts, Opening & Closing Reports) are almost always printed and mailed a month (or a least a week or so) in advance of when the Period of Service - for which they are being billed - actually begins.

So technically, if the Receipts for those Recurring Revenue Invoices - are posted before the entire period of service (for which they were Invoiced) has ended:

oThe Recurring Services that were paid with those Receipts have not yet been provided (or were only been partially provided).

oTherefore, from an accounting standpoint, the Income (i.e., Revenue) which your Company received for those Recurring Services (or at least a portion of that income), could - and probably should - be considered unearned when you received it.

oUnearned Revenue is considered a Company Liability because your Company got the money, may even have spent the money, but your Company still "owes" that Subscriber some (or all) of those services.

oObviously, once your Company has fully provided those Recurring Services, all of the Recurring Revenues associated those Receipts will have been fully earned (i.e., the previously Unearned service Liability has been provided).

 

In summary, Revenue billed is not fully Earned until the service - for which the Subscriber was billed - has been fully provided.

Therefore, the Company's "books" should reflect in some manner, that the Revenues Received for those Services are Deferred (not recognized as Earnings, but instead are acknowledged as a Liability for services owed but not yet provided), until all of the Invoiced Services for which your Company billed, have actually been provided.

 

For General Ledger System Users - When a Recurring Revenue Item is billed automatically, the question is:

When is the Recurring Revenue Earned for the First Month of the Period of Service being billed, and when is that First Month's Recurring Revenue Deferred to the next Month?

a)When the Auto Billing Sale Date entered is within the First Month of the Period of Service being billed, and the Starting Day - which is identified in the Billing Cycle record - is the First day (i.e., '1') of the Month and Year of the Period To Bill chosen in the Auto Billing dialog, the First Month is Earned and posted on the last day of that First Month using Post Deferred Revenue procedure);

b)Otherwise, that First Month's Recurring Revenue is Deferred until the next Month as described below (these are the only other possible cases):

i.The Auto Billing Sale Date entered is dated within the Month before the First Month of the Period of Service being billed (i.e., your Company Bills in Advance) and the Starting Day - which is identified in the Billing Cycle record - is the First day (i.e., '1') of the Month and Year of the Period To Bill chosen in the Auto Billing dialog, therefore the Recurring Revenue is Deferred to the next Month after Sale Date (which in this case is actually the First Month of the Period of Service being billed);

ii.The Auto Billing Sale Date entered is dated on or after the First day of the First Month of the Period of Service being billed, but the Starting Day - which is identified in the Billing Cycle record - is Not the First day (e.g., it is 2...31) of the Month and Year of the Period To Bill identified in the Auto Billing dialog, so the Recurring Revenue for this First Month of the Period of Service being billed will not be fully earned until the next Month, therefore the Earned Recurring Revenue for this First Month is Deferred to the next Month.

c)Earned Revenue is always posted to the General Ledger System  - using the Post Earned Revenue process - on the Last Day of the selected Month being posted, whether that process is run at the end of the Month and Year being posted, or in a subsequent (later) Month.

 

For General Ledger System Users - When Earned and Deferred Revenues are not being tracked:

1.The Net Amount (not including any Sales Tax) is Credited (added) to the associated Sales Account (assigned to that Recurring Revenue Item).

2.The Gross Amount (including Sales Tax, if charged) of each Recurring Revenue Sale is Debited (added) to the Accounts Receivable Asset Account (a Mandatory Account).

3.If Sales Tax was charged, the Amount of that sales tax is Credited (added) to the appropriate Sales Tax Payable Liability Account (i.e., Local Tax, National Tax, or both, as needed).

4.The Net Amount (not including any Sales Tax) is Credited (added) to the Current Earnings Equity Account (a Mandatory Account).

5.The Net Amount (not including any Sales Tax) is Debited (added) to the Earnings Posting Account (a Mandatory Account).

 

For General Ledger System Users - When Earned and Deferred Revenues are being tracked:

1.The Gross Amount (including Sales Tax, if charged) of each Recurring Revenue Sale is Debited (added) to the Accounts Receivable Asset Account (a Mandatory Account).

2.The Net Amount (not including any Sales Tax) is Credited (added) to the associated Deferred Revenue Liability Account

3.If Sales Tax was charged, the Amount of that sales tax is Credited (added) to the appropriate Sales Tax Payable Liability Account (i.e., Local Tax, National Tax, or both, as needed).

4.Then, once each month, the Post Earned Revenue dialog is used to calculate the Earned Recurring Revenue for a selected Accounting Period. where:

a.The Deferred Revenue Liability Account is Debited (reduced) by the Value of the Recurring Revenue that was Earned during the Accounting Period

b.The Sales Account assigned to the Recurring Revenue Item is Credited (increased) by the Value of the Recurring Revenue that was Earned during the Accounting Period

c.The Current Earnings Equity Account (a Mandatory Account) is Credited (increased) by the Value of the Recurring Revenue that was Earned during the Accounting Period

d.The Earnings Posting Expense Account (a Mandatory Account) is Debited (increased) by the Value of the Recurring Revenue that was Earned during the Accounting Period

 

Please read the Understanding Earned and Deferred Revenue chapter in the General Ledger section of these Help Files.

 

This Deferred Revenue Setup menu option only appears if the DeferRecurringRevenue option is set to False ("F") in Company Settings dialog which is accessible from the Company tab of the User Options Form.

 

HelpFilesDeferredRevenueSetupOption

 

It is used to properly initialize the Deferred Recurring Revenue feature within MKMS Accounts Receivable module and - if the General Ledger module is Registered - in the General Ledger System.

 

Note:  Before running the Deferred Revenue Setup Wizard, go into Company Settings and set the Bill in Advance option ("BillInAdvance") to True ("T") or False ("F"), based on your Company's business model.  

1)Bill in Advance means your Company always chooses a Sale Date in the month prior to the Period of Service for which you are Billing Recurring Revenue (i.e., Auto Billing).

Example:

a)You are Billing in Advance -

You are running the Auto Billing process for a Period of Service which starts in March 2018, you would set the Sale Date to a date between 2/1/2018 and 2/28/18.

Using this Bill In Advance method, you may create, Date and mail these Recurring Revenue Invoices anytime in advance - as long as you Date the Invoices in the Month prior to the month when the Period of Service actually starts.

b)You don't Bill in Advance -

If you choose a Sale Date in March 2018 for a Period of Service which starts in March 2018, then your Company DOES NOT Bill in Advance regardless of when you run the process and mail the Invoices.

Using this method, you may create and mail these Recurring Revenue Invoices well in advance - as long as you Date the Invoices in the Month the Period of Service actually starts.

 

2)Once you've made this choice [e.g., the Bill in Advance option ("BillInAdvance") has either been set to True a) or False b) as noted above], and then run the Deferred Revenue Setup Wizard, you must always run the Auto Billing process in the same manner (e.g., whether Billing in Advance, or Not Billing in Advance).

oIf you are not consistent, the Earned and/or Deferred Recurring Revenue related reports will give you inaccurate Values.

oThis is because the Earned & Deferred Revenue calculations executed in the background will take into account the Bill in Advance setting along with the Sale Date and the Date Range of the period of service that is being billed.

 

Once this Deferred Revenue Setup procedure is executed properly, the option no longer appears in this menu.

a.The DeferRecurringRevenue option is automatically set to True ("T") in the Company Settings dialog.

b.Earned and Deferred Revenues are tracked for each Recurring Revenue Detail Line Item on those type of Invoices created within the Accounts Receivable

c.There Financial Transactions will also be recorded in the General Ledger System using the Post Earned Revenue dialog which will periodically calculate, distribute, and post Earned Revenues to the appropriate General Ledger Accounts, the Transaction File, and the Account Register.

d.The Deferred Revenue report lists those Deferred Revenues that will automatically be calculated as part of the Recurring Revenue Billing procedure.

e.The Earned Revenue by Month report tells your Company how much of that previously Deferred Revenue has subsequently been Earned in a User specified Month (or Year).

 

For General Ledger System Users - If there are any records in the Suspended Invoicing Section of any Recurring Revenue items, during this Deferred Revenue Set Up process, those records will be managed as a standard Sale (they will be assigned to the General Ledger Account associated with its Sale-Purchase Item ) - not as a deferred Recurring Revenue item.  

Why?

1)The system does not know exactly when the Suspended Invoice item will be added to a future Invoice;

2)Suspended Invoice items are ignored on the Earned and/or Deferred Recurring Revenue related reports;

3)They are also ignored during the "Post Earned Revenues" process for reason # 1).

 

Therefore it does the safe thing and assumes these Suspended Invoice items are immediately Earned.

 

To open the Deferred Revenue Setup Form:

a)From the Backstage Menu System Select File and Choose Receivable and Select the Deferred Revenue Setup option, or

b)From the Quick Access Menu, Select File and Choose Receivable and Select the Deferred Revenue Setup option

 

The Deferred Revenue Setup Wizard will ensure that all of the components that are necessary to Calculate Deferred Revenue are properly set.

 

HelpFilesDeferredRevenueSetup

Deferred Revenue Setup - Start up Screen

 

Click the Next button to proceed.

 

HelpFilesDeferredRevenueSetup-BillInAdvanceConfirmation

Deferred Revenue Setup - Bill i9n Advance Conformation

 

The "BillInAdvance" option in Company Settings should have been set to True ("T") because that is the reason your Company needs to implement Deferred Revenue Tracking.

Click the Next button to proceed.

 

Review/Assign Recurring Revenue Items dialog - All Recurring Revenue Sale-Purchase Items are listed, along with the Deferred Revenue Liability General Ledger Account Number that was (if it was) assigned to each.  

Select GL Account # - Using the Drop-Down Selection List provided, Choose the Deferred Revenue Liability created for that purpose in the General Ledger Accounts Form.

 

HelpFilesDeferredRevenueSetupGLNumbers-SelectDefaultGLNumber

Deferred Revenue Setup - Review/Assign Recurring Revenue Items Screen - Select GL Account # field

 

Date To Start Deferred Revenue - Use the Drop-Down Calendar/Date Entry field provided to Choose the desired Date when you want to start tracking your Company's Deferred Revenue

 

HelpFilesDeferredRevenueSetupGLNumbers-SelectStartDate

Deferred Revenue Setup - Review/Assign Recurring Revenue Items Screen - Date To Start Deferred Revenue field

 

Recurring Revenue Items List: As illustrated above, all of the existing Recurring Revenue Sale-Purchase Items are included in the list.

Sale Item ID - This column lists each Recurring Revenue Sale-Purchase Item

Description - This column lists the associated Description of each Recurring Revenue Sale-Purchase Item

GL Number - This column displays the current Deferred Revenue Liability General Ledger Account Number assigned to each Recurring Revenue Sale Item

 

(Re-)Setting the appropriate Deferred Revenue Liability General Ledger Account Number

 

HelpFilesDeferredRevenueSetupGLNumberSelection-SetAllOption

 

Set All - Click this option to assign the selected Deferred Revenue Liability General Ledger Account Number to all Recurring Revenue Sale-Purchase Items

Optionally, as shown below, a GL Number may be assigned or modified for any listed GL Number - one at a time.

 

HelpFilesDeferredRevenueSetupGLNumberSelection

 

Click the Next button to continue.

 

Reviewing the Account Balances that will be affected by the changes made in the Review/Assign Recurring Revenue Items dialog:

 

HelpFilesDeferredRevenueSetupAccountBalancesList

 

If any Account Balances will be affected by the addition of and/or changes to the Deferred Revenue Liability General Ledger Account Number, those will be listed in the Form illustrated above.

 

HelpFilesDeferredRevenueSetup-AccountBalances

 

Click the Finish button when done.

 

HelpFilesEnableDeferredRevenue

Confirm - Enable Deferred Revenue?

 

Click the Yes button to Confirm that this is required.

 

HelpFilesDeferredRevenueTrackingIsActive

Complete!  Deferred Revenue tracking is now active.

 

Click the OK button to acknowledge the successful completion of the Deferred Revenue Setup procedure

As indicated, the User must Logout and then Log In again to fully activate the Deferred Revenue process.

 

The Defer Recurring Revenue ("DeferRecurringRevenue") option in Company Settings will be set to True ("T").

 

The Earned and Deferred Revenue Calculations will now be managed by MKMS.

Earned & Deferred Revenues are calculated on a Monthly basis.

Bill in Advance - This means that the Sale Date recorded on the Invoice is the month before the Period of Service starts

Note:

1)Starting Day - The Starting Day - which is identified in the Billing Cycle record - only determines the Day of the Month in which the Period of Service starts as shown on the Invoice.

2)Start Date - The Start Date (Starting Day) of the Period of Service being Billed is not always the "First of the Month" but Deferred and Earned Recurring Revenue is only calculated on a Monthly Basis.

 

Therefore:

a)Whenever the Starting Day is not the "First of the Month" and the Sale Date recorded on the Invoice is in the month before the Month and Year of the Starting Day of the Period of Service for the related Billing Cycle: the associated Recurring Revenue will not be "Earned" until the following month, or

b)Whenever the Sale Date recorded on the Invoice is in a month Prior to the first month of the Date Range of the Period of Service being billed: the associated Recurring Revenue will not be "Earned" for that month until service for the Period of Service month has been provided.

 

Whenever the Sale Date recorded on the Invoice is within starting Month and Year of the Period of Service identified on the Invoice, your Company is not Billing in Advance nor deferring the first months Revenue, so the first month of the Period of Service is "Earned" in that month.

 

For General Ledger System Users - When a Recurring Revenue Item is billed automatically:

a.In all cases, the Gross Amount (including Sales Tax, if charged) of each Recurring Revenue Sale is Debited (added) to the Accounts Receivable Asset Account (a Mandatory Account).

 

b.If Earned and Deferred Revenues is being tracked:

i.The Net Amount (not including any Sales Tax) is Credited (added) to the associated Deferred Revenue Liability Account

ii.If Sales Tax was charged, the Amount of that sales tax is Credited (added) to the appropriate Sales Tax Payable Liability Account (i.e., Local, National, or both, as needed).

iii.Then, once each month, the Post Earned Revenue dialog is used to calculate the Earned Recurring Revenue for a selected Accounting Period. where

iv.The Deferred Revenue Liability Account is Debited (reduced) by the Value of the Recurring Revenue that was Earned during the Accounting Period

v.The Sales Account assigned to the Recurring Revenue Item is Credited (increased) by the Value of the Recurring Revenue that was Earned during the Accounting Period

vi.The Current Earnings Equity Account (a Mandatory Account) is Credited (increased) by the Value of the Recurring Revenue that was Earned during the Accounting Period

vii.The Earnings Posting Expense Account (a Mandatory Account) is Debited (increased) by the Value of the Recurring Revenue that was Earned during the Accounting Period

 

c.As noted in the beginning of this chapter, if Earned and Deferred Revenues is not being tracked:

i.The Net Amount (not including any Sales Tax) is Credited (added) to the associated Sales Account (assigned to that Recurring Revenue Item).

ii.If Sales Tax was charged, the Amount of that sales tax is Credited (added) to the appropriate Sales Tax Payable Liability Account (i.e., Local, National, or both, as needed).

iii.The Net Amount (not including any Sales Tax) is Credited (added) to the Current Earnings Equity Account (a Mandatory Account).

iv.The Net Amount (not including any Sales Tax) is Debited (added) to the Earnings Posting Account (a Mandatory Account).