Deferred Revenue and Expense

Today I have a query related with “Deferred Revenue / Expense”.

Actually I want to what are these? How they are created? What is its effect on “Sales Invoices and Purchase Invoices”.

If you any website link related with this topic, please let me know.

Thank you in Advance.

With warm regards,

Jyotsana

Jyotsana Singh

Posted on behalf of Jyotsana83d

This is exactly the sort of question I think Microsoft need to provide help on in the help file. A lot of consultants, resellers and end-users of Dynamics NAV are not accountants and get really confused by these terms. I am including myself in with that list but it is a topic that I am trying to learn more about.

I Googled the term Deferred Revenue and quite liked this explanation (http://www.moneyinstructor.com/doc/deferredrevenue.asp) from the results.

Here’s an interesting extract…

Unearned rent is deferred revenue. When you are a landlord, and you have a tenant, or renter you are responsible to that individual in providing them with the space they rent. If a renter pays you yearly for rented space, you are obligated to provide that space for a period of one year. What would happen if you failed to provide that space for the term agreed? Would you owe the renter a refund? Most definitely; and it is in this spirit that the unearned revenue is determined to be a liability. You have received the money, but have not provided the service or product, as of yet. At the end of the year, you will have fulfilled your responsibility, and the rent will be fully realized as earned income.

Up until version 5.0 NAV did not really have any standard functionality to cope with this. I think the process was to post the sales invoice (which would credit Revenue and Debit your Debtor Control account) and then reverse it from the revenue account and post the oposit entry to a deffered income liability account in the Balance Sheet. You could then periodically “release” revenue from the deffered income account to the Income Statement through a periodic journal so that the revenue for the rent is taken in to the profit and loss for the period to which it relates. At the end of the year you would have no more deffered revenue and would have taken all of the revenue as income in the income statement throughout the year.

NAV 5.0 includes functionality for pre-payments for sales and purchase invoices. I have not tried this out but, with the correct setup I think it should allow you to do something similar (but maybe the more manual approach is easier anyway.)

If there are any accountants reading this, please add comments or correct my misunderstandings if I have got this wrong.

Hi Gaspode,

I think deferred revenue sounds like “revenue provision”. This is something like expected revenue. In Navision Inventory, we have expected cost, and expected revenue. For services related revenue, it is a bit more complicated. E.g. Project implementations with milestone billings. Most customers I come across, work around these problems with recurring journals in Navision. They reverse a portion of the revenue, and allocate the revenue to months. This can be done with recurring journal. But i guess, it is only a work around, and not an industry specific solution.

You could also view Deferred Revenue Like Flip-Side of Fixed Asset where the Deferred Revenue Could be seen as Liabilities.

The Analogy could be as follows:

Take Rent for example.

When Rent is paid for 2 Years, the value goes to the Income Account as 100% Value in the current period. However, in the real sense, the value should be spread as income over the next 2 years spanning the rent period. Thus, the value will be moved from the Income Account to the Deferred Revenue Account as a Liability. and on a monthly basis for the duration of the Rent, the Monthly Amount is Credited to the Income account and moved from the Deferred Revenue Account in the Balance Sheet.

In Effect, the stages are as follows like FA Posting (Only its the Reverse in Sign)

Post FA Acquisition >> Post Liability Acquisition (-ve FA).

Acquisition Account and Accum. Depreciation Account = Deferred Revenue Account

Recognition Start Date = Rent Start Date

Recognition End Date = Rent End Date

Depreciation Expense Account = Income Account (Rent)

Monthly Periodic Activity Calculate Depreciation = Calculate Recognition.

This will the Create the Recognition Journal that Transfers the Monthly Rent from Deferred Revenue to the Rent (income) Account.

The Monthly Recognition continues until the Book Value of the Liability becomes Zero.


Hope This helps - Sgg

Hi Sunday,

A very nice first post. Welcome to the Dynamics User Group. [:D]