USA Invoicing client in advance of services: deferred revenue or something else?!


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Hello,

I have a client we invoice in advance 1-2 months before services are actually rendered. I know that we should not be recording it to deferred revenue if we haven't actually received any money yet but it shouldn't hit the P&L either. So should it hit some sort of asset account? Accrued revenue? I don't think this is right either but I haven't run into this situation before. Any help would be much appreciated!
 
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Steve-LevelUp

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You have two options.
1. Date the invoice in the future. Eg, send a Mar 1 invoice now. As far as the system is concerned, it is a March invoice. If the customer pays ahead of March 1, then it will show as a pre-payment on their account.

2. Date the invoice today, recording the receivable and deferred revenue today. So, when the payment is received, revenue is not yet recorded until the service is delivered.

It is common for Invoices to be issued that create deferred revenue entries that also hit receivables. From a technical accounting perspective, unpaid invoices should not be in deferred revenue, but from a practical perspective, 95% of invoices issued in this manner are paid timely by the customer.

I hope that helps.
 
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You have two options.
1. Date the invoice in the future. Eg, send a Mar 1 invoice now. As far as the system is concerned, it is a March invoice. If the customer pays ahead of March 1, then it will show as a pre-payment on their account.

2. Date the invoice today, recording the receivable and deferred revenue today. So, when the payment is received, revenue is not yet recorded until the service is delivered.

It is common for Invoices to be issued that create deferred revenue entries that also hit receivables. From a technical accounting perspective, unpaid invoices should not be in deferred revenue, but from a practical perspective, 95% of invoices issued in this manner are paid timely by the customer.

I hope that helps.
Thank you, this does help! However, I am in the 5% situation. I'm closing out the year and want to show the correct amount of deferred revenue, which is 75k. I currently have an additional 225k in unpaid invoices posting to deferred revenue. So since they were already sent out to the client in December (too late to future date the invoice) is there a proper way to record the unpaid portion on the balance sheet? I'm stumped. Could I include it in WIP even though the work has not started?
 

Steve-LevelUp

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One way to do it would be to Dr Deferred Revenue and CR Misc AR as of Dec 31. Reverse this entry as of Jan 1. This would mean that your year end balances are correct, and by reversing it Jan 1, it gets it back to normal, for when the customer pays. This presumes that the invoices were originally posted to Deferred Rev (eg, the invoices original entry was Dr AR, Cr, Deferred) If they are unpaid, you can just reverse these entries (via general GL) without changing the subledger.
 
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Perfect - that sounds like a nice clean solution. Thanks so much, and have a wonderful day!
 

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