Handling upfront payment of 6 months that carries forward to next FY

1

We are a SaaS company (online subscription services) and we offer some discount for upfront payment of 6 months. The problem we’re facing is how to handle the situation when those 6 months are not entirely in the same FY. Our regulations require us to book the income when the services are rendered, but we raised invoice at the start of the 6 month subscription.

2

Create two invoices to cover the 6 month period, each of which is entirely in one financial year.

3

  1. book the income for the future period to a BS account called Deferred Income and use a journal entry to post it to Sales Income on 1st day of new year

  2. Use closing journal entry to move it from P/L account to B/S and opening journal to reverse it back

4

Why don’t you utilize the recurring invoices feature? It works wonders for contracted services.

5

So you are suggesting

  • creating a monthly recurring invoice for all contracted service customers

  • If a customer pays in advance apply the receipt to their accounts receivable (without specifying an invoice) and edit the first or recurring invoice to include the full discount amount.

  • Recurring invoices can then readily be created when due and the appropriate amount will be applied to them by Manager. None of the invoices will span a financial year so accrual reporting will keep financial years service income to the year it was delivered in.

1 Like
6

Yes, and you get to determine the contract period by first date and until date.

7

Thank you all for the solutions you suggested. Summarizing all of them below for anyone who comes searching in the future:

  1. Create 2 invoices, one for each FY.
  2. Book income for the future period to a BS a/c - “Deferred Income” and create a journal entry on the 1st day of the next FY to move it to the PL a/c - “Sales”.
  3. Create a closing journal entry on the last of the current FY to move it from PL to BS a/c. Create another reversal entry on the 1st day of the next FY to reverse it back.
  4. Only record the payment on the date of payment. Create and send individual invoices (discounted) each month when services are rendered. Use the recurring invoices feature of Manager to do this.

All of the above are viable solutions and which one to use will depend on the situation.

For us, we have to raise a single invoice and that too right at the start. This constraint removes solution (1) & (4). We are going with (3) as it seems easier to just worry about this at the end of FY and do all the calculations once and create a total of 2 journal entries.

8

One small issue with doing it using option (3) is that any P & L statements issued for a period other than a full financial year will overstate the actual income - only the full annual P & L will give the true picture and this only once the journal entries have been created.

Also, while recognising the income in the period when it arises it good accounting practise, this will depend on what happens if the contract is terminated before the due date - is the unspent amount refunded to the customer?

9

So when a customer pays an invoice spanning a financial year you are suggesting

  • Pay the full amount to their accounts receivable
  • Add 2 extra balanced line items, one to an expense account, the other to a liability account, both for the component of work delivered in the next financial year.

At the beginning of each financial year create a journal entry to clear the liability account and transfer the funds to a Profit account

10

No, I was suggesting that the Sales Invoice be split into two lines, one to the expense account and one to the B/S account.

All businesses that have subscription services have the same problem about when to recognise the income on the P & L - upfront, month by month, weekly, etc

What decision they take will depend on many factors including tax laws, significance of amounts, reporting frequency

11

I worked for a company that provided monthly newsletters to clients for a fee, usually paid with an annual subscription. The initial entry for the receipt of cash was offset by a “Subscription liability” for the same amount. When each issue was distributed to the client, the subscription liability account was debited and subscription income was credited for the period. If you think about it, if a company were to cease operations with unfulfilled issues of publication, the subscriber would be entitled to a refund of the unpublished issues, hence the liability. My 2 cents.