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

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Have you ever been paid up front for services that will take place over a couple of months, or a job that might take a few months to complete? Let’s show you how you might record that in your forecast, using Deferred income.

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 April for an item which is to go on general sale in July.

When monies are received in April, the transactions will be recorded as:

Debit Bank Accounts £2460

Credit Liabilities £2460

 

In July when the items are delivered to the purchasers, the revenue paid will be represented on the Profit & Loss and the liability reduced to zero:

Credit Sales £2460

Debit Liabilities £2460

 

Representing this in FUTRLI 

Recording the cash inflow

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:

Step 1:

Step 2:

Here we are forecasting the receipt of £2460 of Cash on our Deferred Income line:

This will debit our Bank Accounts by £2460 and Credit our Deferred Income by £2460.

Recognising the revenue

Step 3:

We now need to enter a second forecast item to recognise this revenue in July (or over the number of months the work will be completed, which can be achieved by repeating the entry for the required number of months)

We would do this using the Single/repeating entry method on the income forecast line in question:

Step 4:

After entering our Sales forecast, we need to select Override Journal Defaults.

As we have already received the Cash portion of this transaction, we need to enter this as a No Cash transaction.*

To do this, we need to select Override Journal Defaults 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.

**Please note* No Cash is not selectable unless GST/VAT and Credit Terms have both been set to 0.

  • NJO

    Can this be used on Royalties which is similar? I use a licence for the goods I manufacture and I promise the licensor a minimum of £100k pa royalty. Our year ends are not coterminous and the annual period commences half way through my financial year. I pay the minimum royalty in advance in a quarterly basis – so £25k per quarter. At the end of each quarter, I work out 8% of my cumulative royalty year sales and if that is more than the minimum then I must pay the excess eg at end of Q1 8% of sales is £20k and I have nothing to pay but at the end of Q2 8% of sales for two quarters is £56k so I pay over the extra £6k. If I have a balance left at the end of Q4 it must be written off. The minimum payments are the opposite of the deferred income example. So can the 8% transactions be forced through the same account in some way?