How to Set up Deferred Revenue in QuickBooks- AskAccountings

Setting up deferred revenue in QuickBooks involves setting up a liability account for the deferred revenue, creating a service item for the revenue, and using the item to record the revenue and its associated liability.

Here are the steps to set up deferred revenue in QuickBooks:

  1. Create a Liability Account for Deferred Revenue
    • Go to the “Lists” menu and select “Chart of Accounts.”
    • Click on the “New Account” button in the lower left corner.
    • Choose “Other Current Liability” as the account type.
    • Name the account something like “Deferred Revenue” and provide a description.
    • Save and close the account.
  2. Create a Service Item for the Deferred Revenue
    • Go to the “Lists” menu and select “Item List.”
    • Click on the “New Item” button in the lower left corner.
    • Choose “Service” as the item type.
    • Name the item something like “Deferred Revenue” and provide a description.
    • Choose the “Deferred Revenue” account you created earlier as the income account.
    • Save and close the item.
  3. Record the Deferred Revenue
    • Create an invoice or sales receipt for the customer as usual.
    • Add the “Deferred Revenue” item to the invoice or sales receipt and enter the amount of revenue you want to defer.
    • Save and close the invoice or sales receipt.
    • Go to the “Customers” menu and select “Receive Payments.”
    • Select the customer and the invoice or sales receipt you just created.
    • Enter the full amount of the payment in the “Amount Received” field.
    • Click on the “Discounts and Credits” button.
    • Enter the same amount in the “Amount” field and choose the “Deferred Revenue” item from the “Item” drop-down.
    • Save and close the payment.

Once you’ve followed these steps, the deferred revenue will be recorded as a liability on your balance sheet. When you recognize the revenue in the future, you can use the same “Deferred Revenue” item to reverse the liability and record the revenue.

What Is Deferred Revenue

Deferred revenue, also known as unearned revenue, is a liability account that represents payments that a company has received from customers in advance for goods or services that have not yet been delivered or performed.

For example, a company may receive a payment in advance for a service it will provide in the future, such as an annual subscription to a software service or a pre-payment for a consulting engagement. In this case, the company cannot recognize the revenue until the service is delivered or performed. Instead, it records the payment as deferred revenue and recognizes the revenue when the service is provided.

Deferred revenue is an important accounting concept because it helps companies accurately reflect their financial position by recognizing revenue when it is earned, rather than when it is received. It also helps companies manage their cash flow by providing a way to recognize revenue in advance of performing the associated service or delivering the goods.

The Benefits of Deferred Revenue in QuickBooks

 There are several benefits of using deferred revenue in QuickBooks:

  1. Accurate Financial Reporting: By deferring revenue until the related goods or services are delivered or performed, a company can provide more accurate financial reports that reflect the actual revenue earned during a given period. This is important for understanding the financial health of the company and making strategic business decisions.
  2. Improved Cash Flow Management: Deferred revenue can provide a way for companies to manage their cash flow more effectively by recognizing revenue in advance of performing the associated service or delivering the goods. This can help businesses better plan their expenses and investments.
  3. Simplified Bookkeeping: QuickBooks makes it easy to set up and manage deferred revenue accounts, helping to streamline bookkeeping processes and reduce the risk of errors or misclassifications.
  4. Compliance with Accounting Standards: Deferred revenue is an accounting principle that is required by generally accepted accounting principles (GAAP) and other accounting standards. By using deferred revenue in QuickBooks, companies can ensure that they are in compliance with these standards and avoid potential legal or regulatory issues.
  5. Improved Customer Relations: By recording payments as deferred revenue, companies can more effectively manage customer expectations and ensure that they are delivering the goods or services that customers have paid for. This can help to improve customer satisfaction and loyalty, leading to increased business and revenue in the long run, Learn More