Deferred revenue, also known as unearned revenue, refers to advance payments a company receives for products or services that are to be delivered or performed in the future.
The company that receives the prepayment records the amount as Deferred revenue on their balance sheet as a liability. Deferred revenue is a liability because it refers to revenue that has not been earned and represents products or services that are owed to a customer. As the product or service is delivered over time, it is recognized as revenue on the income statement.
Deferred Revenue Usecase
The internet and broadcasting services providers offers subscription plans on quaterly or yearly basis. They take complete payment in advance from the customer for couple of months, but book income on monthly basis in their books of accounts. Following is how they should configure Deferred Revenue accounting in ERPNext to automate the process.
In the Item master created for the subscription plan, under Deferred Revenue section, check field Enable Deferred Revenue. In this section, you can also select a Deferred Revenue account for this particular item and no. of months.
On creation of Sales Invoice for the Deferred Revenue Item, instead of posting in the Income Account, Deferred Revenue account is Credited by the sale amount.
Based on the From Date and To Date set in the Sales Invoice Item table, Journal Entries are created automatically at the end of each month. It debits the value from Deferred Revenue account and credits Income Account selected for an Item in the Sales Invoice. Following is the example of Income for the deferred Revenue Item is booked via multiple Journal Entries.
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