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How to manage deferred revenue and expenses

Contents

Introduction

In most situations, a company would want to recognize revenues as soon as an invoice is completed. For example, when a food and beverage distributor sells beverages, the revenue for the transaction is recognize as soon as the goods leave the warehouse. In Openbravo, in this situation, revenue is generated as part of the accounting of the sales invoice corresponding to the transaction.

Under some circumstances, however, you need to defer revenue, either in part or in total, to subsequent periods. For example:

Similarly on the expense side, in most cases companies would recognize the expense (for non asset purchases and non stockable products) as soon as the purchase is made. For example, if you buy office supplies (a consumable product that is not capitalized), the expense is recognized at the time of purchase. In Openbravo, in this situation, the expense is generated as part of the accounting of the purchase invoice corresponding to the transaction.

Under some circumstances, however, you need to defer the expense recognition. For example:

Overview

Openbravo allows to support these situations with the deferred revenue and expense capabilities.

Bulbgraph.png   The functionality described in this article is available starting from Openbravo 3 MP17

On the revenue side:

Similarly, on the expense side:

Example

Consider the following situation.

Company F&B Publishing sells a 1 year subscription to F&B Magazine to Healthy Foods Supermarkets on October 17th, 2012. The value of the subscription is $120 and the subscription covers the period from November 2012 to October 2013.

On October 17th and invoice is recorded in the system with a line for the subscription. The line is flagged as requiring revenue deferral, with a deferral period of 12 months starting from November 2013.

The following accounting entries are created based on this invoice:

Date Account Debit Credit
17-OCT-2012 Account Receivables 120.00
Unearned Revenue 120.00
30-NOV-2012 Unearned Revenue 10.00
Revenue 10.00
31-DEC-2012 Unearned Revenue 10.00
Revenue 10.00
... ... ... ...
31-OCT-2013 Unearned Revenue 10.00
Revenue 10.00

Accounting Configuration

General Ledger Configuration

In order to use revenue and expense deferrals, you first need to properly define the default accounts to be used to post deferred revenues and deferred expenses.

This configuration is executed in the General Ledger Configuration window.

Bulbgraph.png   Prior to MP17, this window was called Accounting Schema

In this window in the Default tab, you can find two relevant fields:

HowToManageDeferredRevenueAndExpenses GeneralLedgerConfiguration.png

Product Category

The accounts selected in the General Ledger Configuration window are defaulted to every Product Category. Users can override these defaults at product category level allowing deferred revenues and expenses for different product groups to be posted to different accounts and appear as separate entries in the company balance sheet.

HowToManageDeferredRevenueAndExpenses ProductCategory.png

Execution Steps - Revenues

Configuring Products for Revenue Deferral

In order to defer revenue, you need to properly configure the products that will generate the deferral when sold. In Openbravo, products are created and maintained in the Product window.
Product window; in this window, the configuration related to revenue deferral is in the Header and in the Accounting tab of the Product window.

Header tab:

It is important to notice that the values that the revenue plan you define at product level is the default revenue plan and it can be modified on a transaction by transaction basis.

Accounting tab:

HowToManageDeferredRevenueAndExpenses SalesProducts.png

Manual Invoice Creation

When you create a sales invoice line, you can define at line level, whether the line is going to cause the revenue to be deferred.

The relevant fields are:

HowToManageDeferredRevenueAndExpenses SalesInvoice.png

Automatic Generation of Invoices

If the invoice is created automatically, either from a sales order or from any other document, the product configuration is taken into account and if appropriate the revenue plan is defined for the invoice lines based on the product configuration defaults.

Accounting Results

Regardless of how the invoice is created - manually or automatically - when it is completed and posted a number of accounting entries are created:

The following image shows the accounting generated for an invoice for a 1 year magazine subscription sale and therefore having a 12 months revenue plan.

HowToManageDeferredRevenueAndExpenses RevenueAccounting.png

Execution Steps - Expenses

Configuring Products for Expense Deferral

In order to defer expenses, you need to properly configure the products that will generate the deferral when purchased. In Openbravo, products are created and maintained in the Product window.
Product window; in this window, the configuration related to expense deferral is in the Header and in the Accounting tab of the Product window.

Header tab:

It is important to notice that the values that the expense plan you define at product level are the default expense plan and they can be modified on a transaction by transaction basis.

Accounting tab:

HowToManageDeferredRevenueAndExpenses PurchaseProducts.png

Manual Invoice Creation

When you create a purchase invoice line, you can define at line level, whether the line is going to cause the expense to be deferred.

The relevant fields are:

These fields are defaulted based on the product configuration but the Starting Date field.

Automatic Generation of Invoices

If the invoice is created automatically, either from a purchase order or from any other document, the product configuration is taken into account and if appropriate the expense plan is defined for the invoice lines based on the product configuration defaults.

Accounting Results

Regardless of how the invoice is created - manually or automatically - when it is completed and posted a number of accounting entries are created:

The following image shows the accounting generated for an invoice for business insurance prepaid quarterly and therefore having a 3 months expense plan.

HowToManageDeferredRevenueAndExpenses ExpenseAccounting.png

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This page has been accessed 14,063 times. This page was last modified on 12 November 2012, at 11:04. Content is available under Creative Commons Attribution-ShareAlike 2.5 Spain License.