Recording Prepaid Expenses and Deferred Revenue

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This article covers the following topics:

1. What is deferred revenue?
2. What is a prepaid expense?
3. When to record them
4. Where to enable the option in the software?
5. Automatic and manual entry creation
6. Editing a deferred revenue / prepaid expense after the fact
7. Accounting period closing

What is deferred revenue?

Let's define N as the current accounting period and N+1 as the next one.

Deferred revenue is revenue recorded in period N that actually relates to N+1.

Example

Period N: 01/01/2022 – 12/31/2022 and Period N+1: 01/01/2023 – 12/31/2023

Barack pays a $120 membership fee, valid for 1 year starting 09/01/2022. His membership breaks down as follows:

• 4 months (September through December 2022) fall in period N: $40;
• 8 months (January through August 2023) fall in N+1: $80.

A deferred revenue entry of $80 can be recorded.

To learn more about recording early memberships as deferred revenue, see our dedicated article: Recording transactions for the next accounting period

Impact

When you record deferred revenue, $40 of revenue is recognized in period N and $80 in N+1.

Without this entry, $120 of revenue would appear in period N and $0 in N+1.

From an accounting standpoint

We won't go into full accounting detail here. For more information, refer to your preferred accounting reference or consult a qualified accountant.

Here is the logic:

1. Record $120 of revenue at the accrual date;
2. Record an $80 entry at the close of period N to partially reverse the revenue;
3. Record a reversing entry of $80 at the opening of N+1.

Examples of deferred revenue

• A grant you receive in advance;
• A membership that spans multiple accounting periods (click here to learn more);
• A payment received at year-end for an event taking place the following year.

Payment is completely independent: you can record deferred revenue with a payment in period N or in period N+1.

What is a prepaid expense?

A prepaid expense is an expense recorded in period N that relates to period N+1.

The logic is exactly the same as for deferred revenue.

Examples of prepaid expenses

• Costs incurred at year-end for an event that takes place the following year;
• Liability insurance taken out during the year where part of the coverage applies to the next period;
• Accounting fees that span multiple accounting periods.

Do you need to record deferred revenue and prepaid expenses?

It's up to you to decide whether it makes sense for your organization.

In general, small nonprofits don't bother with this level of complexity. If you do want to record these entries but aren't fully comfortable with the concept, we recommend reaching out to a certified public accountant (CPA).

Our advice: don't dive into something you're not fully confident with.

Where do you enable this option in the software?

To enable the option, go to Settings > Accounting.

Scroll down the page and enable the option to record deferred revenue and prepaid expenses.

Automatic and manual creation of entries

Case 1: Automatic generation of deferred revenue for memberships and events

You can let the software automatically create deferred revenue entries for your memberships and events by enabling the option in your accounting settings.

(Settings > Accounting > Deferred Revenue / Prepaid Expenses > Deferred Revenue Automation)

To learn more about automatic deferred revenue, see this article: Enable and use deferred revenue automation

Case 2: Manually recording a prepaid expense or deferred revenue entry

To manually record a prepaid expense or deferred revenue entry at the time of booking:

• Go to the entry page for an expenditure (in the case of Prepaid Expenses) or a revenue (in the case of Deferred Revenue) from Accounting > Bookkeeping entry;
• On the entry screen, check the Prepaid Expenses / Deferred Revenue box to indicate the deferred portion in the field that appears.
  
  
• If you view the entry after the fact, you will see that multiple entries have been created: one for the current accounting period, and another for the next one.

Editing Deferred Revenue / Prepaid Expenses After the Fact

To modify the deferred revenue portion, there are two options:

1. On the Deferred Revenue Management page (Bookkeeping entry > Deferred Revenue Management), you can find all deferred revenue entries recorded in your accounting.

Simply click the edit icon to modify the percentage or amount of the deferred portion, then save to update your bookkeeping entry.

Please note: at this time, this option is only available for deferred revenue. Prepaid expenses will be added in a future update.

2. Go to the entry detail from the search tool or the journal.

1. Click the Edit button on the main record (located at the top of the page).
2. Go to the Prepaid Expenses / Deferred Revenue option, enter the new amount, and click Save. Your changes have been applied successfully.

Accounting Period Closing

Before starting your accounting period closing, you can edit and validate your deferred revenue and prepaid expense entries.

To add additional deferred revenue or prepaid expense entries, simply go to the relevant entry (via search or the journal, for example), edit it, and select the Deferred option as described in the previous section.

To go further:

• Recording transactions for the next accounting period