Overview:
In Appliance.io, deferred revenue is a critical component of accrual basis accounting. It refers to revenue that cannot be recognized yet because the product or service has not been delivered or performed. Deferred revenue is recorded as a liability on the balance sheet, as the business still has an obligation to deliver the product or complete the service.
This article explains how deferred revenue is tracked in Appliance.io, how it moves from the balance sheet to the income statement, and how the system handles deferred revenue, including situations where internal credit lines are used and how quotes automatically convert into orders.
What is Deferred Revenue?
Deferred revenue represents revenue tied to undelivered products or unperformed services, regardless of whether payment has been received. In accrual accounting, revenue cannot be recognized until the performance obligation is met, meaning the product has been delivered or the service performed.
For appliance dealers, this includes situations where a customer has purchased an appliance, installation service, or protection plan, but the product has not yet been delivered or the service has not been performed.
Key Concepts:
Deferred Revenue:
Definition: Deferred revenue represents amounts for products that haven’t been delivered or services that haven’t been performed, regardless of payment status.
Internal Credit Lines:
Even if the customer uses an internal credit line, revenue is deferred until delivery. Once the product is delivered, revenue is recognized, even if the internal credit line remains unpaid. The unpaid balance is tracked as Accounts Receivable (AR).
How Appliance.io Tracks Deferred Revenue
In Appliance.io, deferred revenue is automatically tracked as part of accrual basis accounting. The system records deferred revenue any time a product or service is invoiced but not yet delivered. Even when an internal credit line is used, revenue is deferred until the product is delivered.
Quotes and Orders:
Quote Stage:
In Appliance.io, a quote cannot reserve, request, or deliver inventory until the balance reaches zero and the quote converts into an order. Refundable deposits applied to quotes are tracked as liabilities and are not considered revenue until the quote converts to an order.Internal Credit Lines:
Internal credit lines allow delivery before payment. When the product is delivered using an internal credit line, revenue is recognized upon delivery, but the unpaid amount is tracked as Accounts Receivable (AR) until the credit line is repaid with real money.
Types of Transactions That Generate Deferred Revenue:
Product Sales:
Revenue for products that have been sold but not yet delivered.Installations:
Revenue for installation services that haven’t been performed yet.Protection Plans:
Revenue for protection plans that haven’t started because the product hasn’t been delivered.Delivery Charges:
Revenue for delivery services, which is deferred until the product is delivered.
Example: How Deferred Revenue is Recorded and Released
Let’s walk through an example of how deferred revenue works in Appliance.io:
Order Creation (Deferred Revenue):
A customer orders an appliance for $1,200 on January 10 using an internal credit line. The product is scheduled for delivery on February 1. The $1,200 is recorded as deferred revenue until the product is delivered.
On the Balance Sheet (January 10):
$1,200 is recorded as deferred revenue (liability) because the product has not been delivered yet, and the credit line remains unpaid.
Product Delivery (Revenue Recognition):
On February 1, the appliance is delivered. Revenue is now recognized, even though the internal credit line has not been repaid. The unpaid amount is tracked as Accounts Receivable (AR).
On the Income Statement (February 1):
$1,200 is recognized as revenue, since the product has been delivered.On the Balance Sheet (February 1):
$1,200 is removed from deferred revenue and recorded as Accounts Receivable (AR) until the credit line is repaid.
Tracking Deferred Revenue for Services
In addition to product sales, deferred revenue is tracked for services such as installation and protection plans if they have not been performed yet. Appliance.io ensures that the revenue is recognized only when the service is completed.
Example:
A customer purchases an installation service for $300 on January 10, but the installation is scheduled for February 5. Until the installation is performed, the $300 is recorded as deferred revenue.
On February 5, once the installation is completed, the $300 is moved from deferred revenue to revenue.
How Deferred Revenue Affects Reports in Appliance.io
Deferred revenue is displayed as a liability on the balance sheet until the obligation (delivery or service) is fulfilled. Understanding how deferred revenue impacts financial reports is essential for accurate accounting:
Balance Sheet:
Deferred revenue appears as a liability, showing the amount invoiced or paid but not yet recognized as revenue.Income Statement (Accrual):
Deferred revenue is not shown as income until the product is delivered or the service is completed. Any unpaid balance for delivered products (if an internal credit line is used) is tracked as Accounts Receivable (AR).
Note: There is no toggle for cash or accrual in the deferred revenue report, as deferred revenue is an accrual-based concept only.
Key Points to Remember:
Deferred revenue represents products not yet delivered or services not yet performed.
Revenue is recognized when the product is delivered or service is completed, even if payment has not been received.
Internal credit lines: Revenue is recognized when the product is delivered, even if the credit line is unpaid. The unpaid balance is tracked as Accounts Receivable (AR).
Appliance.io automatically tracks deferred revenue and moves it to the income statement once the obligation is fulfilled.
Conclusion:
Managing deferred revenue is crucial for maintaining accurate financial records under accrual accounting. Appliance.io ensures that deferred revenue is tracked as a liability until the product is delivered or the service is completed. This process allows appliance dealers to maintain compliance with accrual accounting principles and have a clear view of their financials.