Payments you receive from your customers for services that you will be providing over a period of time in the future are called deferred or unearned revenue.
The prepayment received from your customer is recorded as a liability on your company’s balance sheet under “Deferred Revenue.” Since it denotes income that has not yet been earned and represents services that are still owed to a customer, deferred revenue is a liability. As and when you deliver the service to your customer, the corresponding amount will be moved from liability to income.
Let us understand this through an example:
Suppose you are a writer. You sign a contract with your customer and receive ₹12,000 immediately. In return, you agree to offer your services for the next twelve months. As such, this amount would first be recognized as a liability on your balance sheet until the service is rendered. Every month, you recognize ₹1,000 as income and at the end of twelve months, the entire amount can now be recognized as income. The initial amount of ₹12,000 can be seen as an example of deferred revenue.
To access deferred revenue on ERPNext, follow these steps:
- Tick the ‘Enable Deferred Revenue’ checkbox under the ‘Accounting’ tab in the Item DocType.
- Create a ledger under ‘Current Liabilities’.
- Select the item and the ledger in the sales invoice. Additionally, specify the period during which the service will be provided.
ERPNext will automatically defer the revenue to be received for the service over the specified period of time.