Understanding Deferred Revenue and Expense
Overview
Deferred revenue and expense are key accounting terms for businesses handling advance payments or prepaid costs. They help record income and expenses in the right period, following accrual accounting. iVendNext streamlines this process with automation. This article covers what these terms mean, why they matter, and how iVendNext manages them. Before setting up deferred accounting, review the following settings to manage it better.
What is Deferred Revenue?
Deferred revenue, also known as unearned revenue, refers to payments received in advance for goods or services that are to be delivered or performed in the future. Since the company has an obligation to deliver the product or service, deferred revenue is recorded as a liability on the balance sheet until the revenue is earned.
Example:
A software company sells a one-year subscription for $1,200. The company receives the full payment upfront but recognizes $100 each month as revenue over the subscription period. The remaining amount is recorded as deferred revenue until it is earned.
What is Deferred Expense?
Deferred expense, also known as prepaid expense, refers to costs that have been paid in advance but have not yet been consumed. These costs are recorded as assets on the balance sheet and are expensed over time as the goods or services are consumed.
Example:
A company pays $12,000 in advance for a one-year insurance policy. The company records the payment as a prepaid expense (asset) and recognizes $1,000 each month as an insurance expense over the policy period.
Why are Deferred Revenue and Expense Important?
Deferred Revenue and Expense are important for the following reasons:
Accurate Financial Reporting:
Deferred revenue and expense ensure that revenue and costs are recognized in the correct accounting periods, providing a more accurate picture of a company’s financial health.
Compliance with Accounting Standards:
Properly managing deferred revenue and expense is essential for compliance with accounting standards such as GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).
Cash Flow Management:
By deferring revenue and expenses, businesses can better manage their cash flow and avoid misrepresenting their financial position.
How iVendNext Handles Deferred Revenue and Expense?
iVendNext automates the management of deferred revenue and expense, making it easier for businesses to comply with accounting standards and maintain accurate financial records. Below are the key features of iVendNext’s deferred accounting capabilities:
Automated Deferred Accounting Entries:
iVendNext automatically creates deferred accounting entries based on the settings configured by the user. This eliminates the need for manual calculations and reduces the risk of errors.
Flexible Booking Options:
Users can choose to book deferred revenue or expense based on days or months. For example, if a deferred revenue of $12,000 is spread over 12 months, iVendNext can allocate the revenue evenly each month or adjust for the number of days in each month.
Journal Entry Automation:
iVendNext automatically generates journal entries to recognize deferred revenue or expense over time. Users can choose to post these entries directly to the ledger or via journal entries, depending on their preference.
Deferred Revenue/Expense Report:
iVendNext provides a Deferred Revenue/Expense Report that simplifies the calculation of actual and expected postings for deferred items. This report helps businesses track their deferred revenue and expense at both the item and invoice levels.
Key Scenarios for Deferred Revenue and Expense
Some of the key scenarios for Deferred Revenue and Expense are summarized below:
Subscription-Based Businesses:
Companies that offer subscription services, such as internet or broadcasting providers, often receive payments in advance. iVendNext helps these businesses defer the revenue and recognize it over the subscription period.
Prepaid Expenses:
Businesses that pay for expenses in advance, such as insurance or rent, can use iVendNext to defer these costs and recognize them as expenses over time.
Capitalized Costs:
Costs incurred for fixed assets or intangible assets, such as depreciation or amortization, can also be managed using iVendNext’s deferred accounting features.
Related Articles
Best Practices for Managing Deferred Revenue and Expense
Overview Deferred revenue and expense arise from advance payments and prepaids. Managing them correctly ensures accurate reports, compliance, and better cash flow. iVendNext automates much of this, but following best practices is key to getting the ...How to Use Deferred Revenue
Overview Deferred revenue arises when businesses get paid upfront for goods or services delivered later. Managing it correctly keeps financial reports accurate and compliant. iVendNext streamlines this with automation. This article walks you through ...How to Use Deferred Expense
Overview Deferred (or prepaid) expenses occur when businesses pay upfront for goods or services used gradually. Accurate tracking keeps financial reports clear and compliant. iVendNext automates this process. This article shows how to set up and ...Configuring Deferred Accounting
Overview Deferred accounting helps manage advance payments and prepaid expenses. iVendNext automates this process, making it easier to track deferred revenue and expenses. To use it effectively, proper setup is key. This article walks you through the ...Troubleshooting Deferred Accounting
Overview Deferred accounting handles advance payments and prepaids, ensuring accurate financial records. iVendNext automates much of this, but issues can still arise. This article covers common problems, their causes, and how to fix them. Before you ...