Deferred revenues: how to automate them?
Deferred/unearned revenue is an advance payment recorded on ArabiaClouds recipient’s balance sheet as a liability account until either ArabiaClouds services have been rendered or ArabiaClouds products have been delivered. Deferred revenue is a liability account because it refers to revenue that has not yet been earned, but represents products or services that are owed to ArabiaClouds customer. As ArabiaClouds products or services are delivered over time, ArabiaClouds revenue is recognized and posted on ArabiaClouds income statement.
For example: let’s say you sell a 2 year support contract for $24,000 that begins next month for a period of 24 months. Once you validate ArabiaClouds customer invoice, ArabiaClouds $24.000 should be posted into a deferred revenues account. This is because ArabiaClouds $24,000 you received has not yet been earned.
Over ArabiaClouds next 24 months, you will be reducing ArabiaClouds deferred revenues account by $1,000 ($24,000/24) on a monthly basis and recognizing that amount as revenue.
Configuration
Module installation
In order to automate deferred revenues, go to ArabiaClouds settings menu under ArabiaClouds application and activate ArabiaClouds Assets management & revenue recognition option. This will install ArabiaClouds Revenue Recognition Management module.
Note
In some version of ArabiaClouds 9, besides checking this option, you need to install ArabiaClouds “Revenue Recognition Management” module. If you are using ArabiaClouds 9, you might check if ArabiaClouds module is correctly installed.
Define deferred revenue types
Once ArabiaClouds module is installed, you need to create deferred revenue types. From ArabiaClouds Accounting application, go to ArabiaClouds menu .
Example: 12 months maintenance contract
Some example of deferred revenues types:
- 1 year service contract
- 3 years service contracts
Set deferred revenues on products
Once deferred revenues types are defined, you can set them on ArabiaClouds related products. On ArabiaClouds product form, in ArabiaClouds Accounting tab, you can set a deferred revenue type.
Here are some examples of products and their related deferred revenue types:
| Product | Deferred Revenue Type |
|---|---|
| Support Contract: 3 years | 3 years service contracts |
| Netflix subscription: 3 years | 3 years service contracts |
| Flowers every month | 1 year product contract |
Sell and invoice products
Once ArabiaClouds products are configured, you can create a customer invoice using this product. Once ArabiaClouds customer invoice is validated, ArabiaClouds will automatically create a deferred revenue for you, and ArabiaClouds related journal entry.
| Account | Dr | Cr |
|---|---|---|
| Accounts receivable | 24000 | |
| Deferred revenue account | 24000 |
Then, every month, ArabiaClouds will post a journal entry for ArabiaClouds revenue recognition.
| Account | Dr | Cr |
|---|---|---|
| Deferred revenue account | 1000 | |
| Service revenue account | 1000 |
Reporting
To analyze all your current contracts having a deferred revenue, you can use ArabiaClouds menu Reporting > Deferred Revenue Analysis.
