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What is deferred revenue?
Deferred revenue is an advance payment that is recorded in the balance sheet of the recipient as a liability until the service is provided or the product is delivered. Buyer prepayment is a liability as it relates to unrealized sales but it represents the product/service owed to the customer. When products or services are provided, revenue is recognized and shown in the income statement.
Example: Let’s say you sell a 2-year support contract for $24000 starting next month over a 24-month period. Upon confirmation of the invoice to the customer, the amount of USD 24000 will be recognized as a prepayment by the buyer. This is because the amount of 24000 USD you received but not earned.
Over 24 months, you’ll reduce your monthly prepayment by $1,000 ($24,000/24) and record that as revenue.
Configuration of deferred revenue
Install the module
To automate the recognition of prepayments by buyers, go to the settings menu in the Accounting app ‣ Configure and enable the Asset Management & Revenue Recognition option. This is the step to install the Revenue Recognition Management module.
In some versions of Kiu ERP 9, in addition to selecting this option, you need to install the Revenue Recognition Management module. If you are using Kiu ERP 9, you may need to check if the mode is installed correctly.
Identify types of deferred revenue
Once the module is installed, you need to generate prepaid buyer receipts. From the Accounting app, go to the Configuration menu ‣ deferred revenue types.
Example: 12 month maintenance contract
Some examples of types of prepayments are:
- 1 year service contract
- 3 year service contract
Set up a prepaid buyer charge on the product
Once prepaid buyer receipts are confirmed, you need to set them up in comparable products. On the product module, in the Accounting tab, you need to set up a prepayment from the buyer.
Sell and invoice products
Once the product has been configured, you can create an invoice for the customer using the product. Once the invoice is confirmed, Kiu ERP will automatically generate a prepaid customer receipt and related journaling for you.
After that, every month, Kiu ERP will automatically record an entry for revenue recognition
To analyze all existing contracts with prepaid customer receipts, you can use the menu Make Reports > Analyze prepayments.