Forecasting Deferred Income
Deferred income is any revenue which is received in advance of a service being rendered or a product delivered to the purchaser. Deferred Income can be forecasted in FUTRLI using the Advanced Options.
Written by Ross MacLeod
Deferred income is any revenue which is received in advance of a service being rendered or a product delivered to the purchaser. In accordance with the Revenue Recognition principle, cash received in advance is not recognised until the goods or services have been sent to or provided to the purchaser, at which point it will be represented as a source of revenue on the Profit & Loss. Until that point, cash received for the goods or services will be recorded as a liability on the Balance Sheet.
Deferred Income Example
£2460 worth of pre-orders are made in October for an item which is to go on general sale in December. When monies are received in October, the transactions will be recorded as:
Debit Bank Accounts £2460
Credit Liabilities £2460
Credit Sales £2460
Debit Liabilities £2460
Representing this in FUTRLI
In FUTRLI the above entries would be recorded by creating two forecast items, one against the appropriate Liability line and one against the appropriate Sales line. In the below example, we’re going to enter the receipt of Cash against our Deferred Income line using the Single/Repeating entry method:
This will debit our Bank Accounts by £2460 and Credit our Deferred Income by £2460.
We now need to enter a second forecast item to recognise this revenue in December. We would do this using the Single/repeating entry method on the Sales line in question:
As we have already received the Cash portion of this transaction, we need to use FUTRLI’s Advanced Options to enter this as a No Cash transaction. *Please note* No Cash is not selectable unless GST/VAT and Credit Terms have both been set to 0. To do this, we need to select Advanced options at the bottom of the window and then ‘No cash’ from the first dropdown menu. As we are now recognising the pre-paid sales, we now also need to reduce the liability we created earlier to zero. To do this we simply select the Deferred Income line from the third dropdown menu:
This allows us to override the default behaviours and enter this as a No Cash transaction.