Recording Prepaid Expenses / Deferred Revenue

This article covers the following topics:

1. What is deferred revenue?
2. What are prepaid expenses?
3. Do you need to record them?
4. Where to enable the option in the software?
5. Automatic and manual entry creation
6. Editing deferred revenue / prepaid expenses after the fact
7. Closing the accounting period

What is deferred revenue?

Let N represent the current accounting period and N+1 the following one.

Deferred revenue is revenue recorded in accounting 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, valid for 1 year starting 09/01/2022. His membership breaks down as follows:

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

You can record $80 as deferred revenue.

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

Impact

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

Without this entry, you would have recognized $120 in period N and $0 in N+1.

From an accounting standpoint

We won't go into all the accounting details here. The logic works as follows:

1. Record $120 of revenue at the accrual date;
2. At the closing of period N, record an $80 entry that partially reverses that revenue;
3. Record the reverse $80 entry 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);
• Registration fees received at year-end for an event taking place the following year.

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

What are prepaid expenses?

Prepaid expenses are expenses recorded in accounting period N that actually relate to N+1.

The logic is exactly the same as for deferred revenue.

Examples of prepaid expenses

• Costs incurred at year-end for an event taking place the following year;
• Liability insurance taken out mid-year where part of the coverage extends into 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.

Smaller nonprofits typically skip this level of complexity. If you want to record these entries but aren't confident with the concept, we recommend consulting a CPA.

Our advice: don't take on something you're not comfortable with.

Where to enable the 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 entry creation

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: Enabling and using deferred revenue automation

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

To manually record prepaid expenses or deferred revenue at the time of entry:

• Go to the expenditure entry page (for prepaid expenses) or the revenue entry page (for deferred revenue) from Accounting > Book Entry;
• On the entry screen, check the Prepaid Expense / Deferred Revenue box and enter the deferred amount in the field that appears.
  
  
• If you view the entry after the fact, you'll see a page like this:
  Multiple entries will have been created: one for the current accounting period, and another for the next one.

Editing deferred revenue / prepaid expenses after the fact

There are two ways to edit the deferred revenue amount:

1. On the Deferred Revenue Management page (Book Entry > Deferred Revenue Management), you can view all deferred revenue entries recorded in your books.

Click the edit icon to update the percentage or amount of the deferred portion, then save to update your accounting record.

Note: currently, this option is only available for deferred revenue. Support for prepaid expenses will be added in a future update.

2. Go to the entry details using 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 Expense / Deferred Revenue option, enter the new amount, and click Save. Your changes have been applied successfully.

Closing the accounting period

Before closing your accounting period, you'll be able to review and confirm your deferred revenue and prepaid expense entries. Here's an example of the validation table:

To add more deferred revenue or prepaid expense entries, 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.

Further reading:

• Recording transactions in the next accounting period