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Booked Contracts, Deferred Revenue, Quickbooks

Proformative, I was wondering what everyone process is for recording signed contracts and deferred revenue. Background/Example: - $50k/yr contract booked in 1/2016; paid quarterly - Invoiced at start of each quarter, Net 30 Approach: - Upon signing of the contract, I am considering creating a journal entry that Debits "Deferred Revenue" and Credits "Revenue" for the TOTAL booking (i.e $50k). Recurring journal entries will move 1/12th of the Deferred Revenue back into Revenue as it is earned. As a result, I will be able to not only recognize revenue, but this process will enable me to view the full contract value. - However, I was recently notified that this is the incorrect approach and should only move the quarterly invoice amount (i.e 1/4th of $50k) to Deferred Revenue. Questions: 1) Can someone explain their typical workflows when dealing with a similar situation? 2) Can someone explain why moving the entire contract value to Deferred Revenue is a "no-no" 3) How do you typically track total contract values en-masse?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I think your entry is wrong if I understand what you are saying

On the signing of the contract (for services?) it s/b a debit to a/r and a credit to deferred revenues for the 1st w.r.t. Amount.

You haven't performed any services, so you really don't have revenue. At the end of each month a journal entry that debits deferred revenue and credits revenue for 1/3 the invoice.

At the beginning of next quarter repeat.

When you get paid, debit cash/credit a/r.

Tracking total value can Be accomplished many different ways depending on your accounting system (it has this feature, you kludge the system for reporting purposes (department/project, etc) or you do it in Excel.

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

Wayne is correct on the first entry. Someone might have advised against putting the total contract value in deferred because you would potentially be overstating A/R and deferred in your balance sheet (depending on your contracts, it could be by sizable amounts).

Tracking the TCV depends on your business practices and systems. I am guessing you want to be able to report on it it alongside your other financial data. If your system supports it, you can create statistical accounts to capture the bookings info and only record deferred and earned revenue entries off of your billings.

You can also record TCV in its entirely and just create contra accounts to eliminate the unbilled portions of the contracts.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Ken, et. al.,

I wrote that answer on my iPhone, and what got garbled was the 1st qtr (not "1st w.r.t") amount.

Thus we are actually in sync.

Patti,

Good idea, and there are many SAAS based systems that allow you to either create a recurring invoice or template (as well as all systems allow recurring journal entries).

And Didier, I've been there as well.

Patti Luers
Title: Consultant
Company: Virtual Accountants Group
(Consultant, Virtual Accountants Group) |

I worked for a company that approached revenue in a similar way to what you are describing. Annual contracts would be signed, and client would either pay everything up front (nice client, right?), or ask to be invoiced quarterly or even monthly. We used QuickBooks, which handled this quite well. Revenue from each contract would be evenly allocated at 1/12 of the TCV at the end of each month, as it was earned.

Our approach was to create ALL invoices for the contract and future date the appropriate invoices. If we wanted to, we could mark the future dated invoices pending, which means they had no posting repercussions until released. Running a pending invoices report would allow us to track and release them. We ultimately left them as future posting transactions because of the strategic value it served.

The items used for invoices were mapped directly to the deferred revenue account, and each month, hundreds of journal entries would be posted to move the appropriate amount for that month from that deferred revenue account to earned income.

The benefit to this approach was that all invoices were in the system, and we wouldn't inadvertently miss billing the client. We could look at the invoice list and see based on date which were now due to be sent to the client.

Also, generating the financials based on thru dates (YTD, previous end of month, etc.), gave us the correct results because future dated invoices were not included and future deferred revenue was not included either.

The benefit to this is that we could leverage the accounting system to project future cash flow, revenues, etc. - something the management team found very useful in their strategic planning.

There is a reconciliation method to double check the deferred balance totals for each client to ensure that revenues are appropriately booked - not underbooked or overbooked according to the contract. Happy to share if you are interested!

Didier Jupillat
Title: CFO
Company: Atlantic.net
(CFO, Atlantic.net) |

Patti, I like the way you were creating all future invoices! I would have loved to do that at a previous company, but unfortunately contract amendments were the norm, not the exception! So I used the recurring invoice feature in QuickBooks that would allow me to change the template when needed instead of going back and editing all existing future invoices.

Also, it would have been great to use predefined items in the invoices like you were doing, directly linked to the deferred revenue account, but it would have been confusing for the customers to see different line items in there (we needed to show different revenue lines per contract), so I had to do the mapping the hard way, in a separate spreadsheet!

Otherwise, pretty much the same approach!

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

The way Patti described it is similar to how we did it at one of my former employers. We were not on QB, but we converted over full deal amounts from Salesforce into current period invoices and eliminated advance billings from the A/R and deferred via journals. The elimination excluded any paid advance billings.

Our system (Intacct) scheduled all the revenue postings and you could run a full report of the deferred revenue values by month to project out future revenues. We had a pretty good lock on GAAP and non-GAAP reporting measures as a result (we also reported the statistical bookings values).

The process Patti described in terms of future dating invoicing vs. my elimination methodology sounds solid so you have two ways to go at it depending on what makes the most sense for you. We presented single invoices that detailed the payment dates; if there was a customer who only wanted a periodic invoice we sent them one.

I am sure there are others who have good suggestions too.

David Ancona-Cole
Title: Senior Accountant & Financial Analyst
Company: ScienceLogic
(Senior Accountant & Financial Analyst, ScienceLogic) |

Jon,

Quickbooks is not meant to handle subscription revenue and bookings. I would recommend tracking the Total Contract Value in Salesforce or a spreadsheet. You can track deferred revenue in a spreadsheet as well and make reconciling adjustment entries at the end of each month to adjust the income accounts. Technically, putting an entire contract in deferred revenue is grossing up the balance sheet. If your subscription business is going to get more advanced, I would say it might be time to look at a software like SaaSoptics or Intacct that can handle it.

Thanks,
David

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

Deferred Revenue should reflect only amounts actually invoiced. We capture Contract Value through Sales Orders in NetSuite which have billing schedules (and then invoices) attached to them. You can also set up revenue recognition schedules to capture ratable recognition.

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