Revenue Deferral (Revenue Recognition) is a crucial accounting practice that enables businesses to accurately reflect their financial performance over time, especially in industries where services are rendered, or products are delivered over extended periods. In this blog post, we’ll explore the step-by-step process of deferring revenue, highlighting essential tasks such as creating estimates, issuing sales and change order invoices (earned revenue), and managing deposit-retainers (unearned or deferred revenue). I recommend using QuickBooks Online Advanced with Excel Spreadsheet Sync for large projects. (In the case of inventory management and reporting Finale Inventory is a QuickBooks Online Solutions Partner) although there are other apps that integrate with QBO for Inventory and Ecommerce. Your records in QBO should match the records of Finale Inventory. Sync with Spreadsheet Sync, Finale or other apps only after you have run a BOM (Bill of Materials) report establishing your basis/historical transactions of Inventory, COGS and Sales, save records to My Accountant > Shared Documents.
Revenue Deferral for Retail: (before beginning be sure products and services are entered into the system, including sales price, and cost of goods sold and are mapped correctly to your financial statements. (Sales tax needs to be entered correctly for each product or service.)
Step 1: Create an Estimate (Non-Posting)
Start with a detailed estimate outlining the inventory quantity, costs, and timeline for delivery.
Duplicate the estimate:
Approved copy for invoicing/sales receipt (unchangeable)
Pending copy for purchasing
Step 2: Create a Purchase Order from the pending Estimate
After approval of the estimate, create a purchase order and deliver to the Vendor.
This Vendor approved PO links the estimate to the Bill for inventory + COGS + markup (per product and service item(s)). When received upload the bill from the Vendor to Transactions > Receipts (If you are required to enter a customer name, use generic Inventory (c), class according to your setup for the ecommerce provider, mark billable. This will track the inventory on the Unbilled Charges report, populate A/P, and add to inventory in stock for each product item) NOTE: The rate column on a bill is COGS and the Sales Amount column is sales price (e.g. COGS .50 cents - Sales Price $1.00 = .50 gross profit (so 100% markup, which you will select markup on the bill. If the cost has changed from the PO to Bill, you will want to update your product and service item accordingly.
The items are check marked billable and marked up directly on the bill (Cost Plus billing) and matched to the PO and a (spent transaction) in the bank feed when paid. The markup amount will appear as a separate Income line item on the income statement when products are sold via Invoice or Sales Receipt. Billable Income and billable expense line items should match EOM, leaving you with the gross profit (markup income). Typical of Cost-Plus Billing, your Income will be clearly visible as the difference between Markup Income + Item Income - billed Item COGS = Gross Profit
(example: Bill COGS $100 + 20% MU = Invoice $120 Sold Income = $20 Markup Gross Profit)
The rule of COGS calculations:
An invoice (income) + bill attachment (Item: COGS) with markup = gross profit.
An invoice (income) + bill attachment (Item: COGS) and no markup is a reimbursement = zero gross profit.
An invoice with no bill or expense attachment will not calculate COGS (if not stated in your products and services), increasing your stated gross profit-income, and your tax liability.
An Invoice with only a receipt attachment may not calculate the true COGS, or COGS at all, to your income statement (from the receipt) if the price and cost are pulling from the products and services and no billable expense item is attached. Increasing gross profit income and your tax liability.
Sales, Inventory and COGS should be reconciled EOM.
Create a (BOM) monthly and save to My Accountant > Shared Documents, maintaining a historical record of Inventory, COGS and Sales.
Step 3: Create Sales Invoice(s) or import from your Ecommerce App
Check that the sales price is correct! I noticed that invoices are converting "rate (COGS)" instead of sales amount (sales price)" when opening an invoice. 1/24/2025 I have requested that the mark up field be returned to the estimates and that products and services items setup of purchase field show: cost & amount for COGS or expense and that the income field show sales price & income account only removing 'rate' as this is inaccurate and does not reflect the correct columns from a Bill (see above) It wouldn't hurt to flip the category drop down field with the item drop down field on a Bill either! Categories are for overhead expenses and Items are for products and services you sell (to be invoiced).
Please send a request to correct from the Gear Icon > Feedback to QBO software engineers to correct this.
Sales invoices or sales receipts from Ecommerce should be mapped to appropriate Product Item (which is already mapped to the appropriate income account and COGS on the general ledger, with sales tax for the product established)
Dated to the day of sales (e.g. batch close) Due to Nexus tracking laws, all sales must be imported per sale, per customer and location, and include origin of item(s) (ship from) location with other associated fees such as shipping income, shipping costs, merchant fees, etc.... Review: Integrating Your Ecommerce App
When the income from the sale(s) comes through the bank feed for the day (batch close) the deposit amount should match all of the sales documents with items sales prices + be check marked taxable (tax rate mapped to sales tax liability on the balance sheet and calculated as a total. (Sales tax should have already been set up in your products and services for each inventory item)
If you are dealing with a Marketplace Facilitator and they are paying your sales tax, add a separate line (service item mapped to Prepaid Expense Asset) and subtract (-) the amount of the total sales tax due on the sales receipt. This will credit (increase) your sales tax liability and debit (increase) Prepaid Expenses Asset. Your A/R will include only the items sold on the invoice. You will need to make the payment, from the sales tax module as a payment from Prepaid Expenses, when you confirm the sale tax was paid by the Marketplace Facilitator. Reconcile the account monthly.
Otherwise for Payment Processors, who are not paying your sales tax, follow the normal procedure, items + taxable, and follow appropriate requirements of the state to whom sales tax payments are due.
Sales tax is always the seller's responsibility, and the liability accounts need to be reconciled monthly, even if no payment has been made until quarter end. Payments are made based on your filing status and nexus obligations.
The sales receipt or invoice will reduce inventory in stock and transfer the cost of goods sold based on the information in your products and services, or per the attached bill from the unbilled charges report to your income statement.
I noticed that if you don't invoice for all items on the bill the bill is removed from the unbilled charges report and the items remaining in stock will not appear for the particular generic inventory (c) when trying to rebill and you cannot mark the bill to be included on the unbilled charges report again. QBO Engineers should remove the requirement to add a customer name to a bill, allowing the Unbilled charges to be distributed (BIN Holding) to as many customers as necessary, or to a particular customer, but remain on the unbilled charges report until fully depleted. This is inventory accounting appropriate.
On 1/24/2025 I requested this feature be corrected. Please send feedback to QBO Engineers Gear Icon > Feedback.
Notes regarding Sales Tax:
If the invoice has not been paid: The invoice or sales receipt can be edited directly.
If the invoice has been paid: A refund to the customer must be made including the sales tax they were charged.
Issuing Refunds will produce a credit (decrease) to the bank account where the funds were deposited to in the initial sale, and a debit (decrease) to the sales tax liability account, as well as increase (debit) inventory, and (credit) COGS.
A refund check or credit card credit will be issued to the customer, after approval. QBO engineers need to remove the immediate credit processing! Gear Icon > Feedback
(Confirm the Credit Memo is in fact "bad debt" and not inventory theft, customer and location needs to be recorded, along with inventory and sales tax adjustments)
If an invoice has not been paid and is considered "Bad Debt" it is best to issue and apply a Credit Memo. Intuit calls it "Bad Debt" but really, it is a write off of uncollected A/R, which is the reversal of a sale. Your Item on the credit memo can link to Bad Debt as expense, though the IRS considers Allowances and Refunds as Contra-Accounting, which makes it (negative) Income. On the products and services set up, set the income account as the bad debt expense. Don't forget to apply the Credit Memo to the open invoice!
Issuing "Bad Debt" Credit Memos will clear A/R, and clear sales tax liability (bad debt should be set up as taxable if the original sale was taxed), but not affect the bank account balance. The bad debt expense account on the income statement will show an expense but will not be reflected against the products and services (item originally sold) report. In addition, if the sales tax collected on a bad debt was already reported and paid. A credit should be requested on the next sales tax state filing and be recorded in the sales tax module in the current month the bad debt is created.
If inventory is being tracked in QBO: a Credit Memo should be issued for the original product sold thereby replacing the inventory item to stock, clearing A/R and clearing the sales tax liability and will appear on the products and services report. Don't forget to apply the Credit Memo to the open invoice!
If the credit memo is really a refund you will need to follow refund receipt processes.
IRS Topic: Bad Debt Deductions
Voiding, Deleting and Changing Dates of Invoices/Sales Receipts
If you void or delete an invoice that has a payment attached to it, QuickBooks won’t delete the payment, you’ll need to apply it to a different invoice.
If sales tax was already included on your sales tax report your sales tax liability will be out of balance. I suggest you not delete sales documents connected to state sales tax.
If you change dates on a sales document that has sales tax, and the tax was already reported, your sales tax liabilities will be out of balance. I suggest you not change dates on sales documents connected to state sales tax.
A word of caution: journal entries made to adjust for taxable sales and income can cause problems with QBO sales tax liabilities, the sales tax module and Inventory. In addition, changes in tax laws and rates are not automatically updated. I do not recommend journal entry accounting with ecommerce.
Optional: Create a Deposit-Deferred Revenue Invoice
(Only works with Marketplace Facilitators due to sales tax obligations)
Step 1)
After bill approval, create an invoice for the items and attach the bill (Keep in mind the bill will increase A/P and inventory). The invoice will have a line for the items (+) and for the items (-) and an additional line (+) for deferred revenue. This does not increase A/R rather it will date the items on the invoice to a future date, becoming deferred revenue items.
The invoice links the Estimate + PO + Bill. I would suggest updating your products and services to reflect appropriate COGS (cost).
Step 2)
Immediately after entering the invoice create a copy and add a line for (-) deferred-revenue plus the inventory items are (+) amounts only.
This invoice should be dated to the expected sale of all inventory items. I recommend Days of Sales Inventory
This invoice will increase A/R, reduce inventory on hand, move deferred income to the income statement (earned revenue) and calculate COGS from your products and services Item cost.
Match payments (to undeposited funds) and reconcile the bank deposit accurately on the earned revenue date.
These steps adhere to GAAP standards, supports accurate financial reporting, and aids financial planning and analysis. With the exception of the red highlighted items. I suggested you ask QBO engineers to correct! Gear Icon > Feedback
Revenue Recognition Standards for Ecommerce and Store Front Retail
Key Tip: Use linked transactions (estimates, POs, bills, invoices, etc.) instead of journal entries to maintain accuracy and clarity, maintaining a clear audit trail. See example transactions below.
See Also: The Importance of Establishing and Following Consistent Accounting Procedures: Fraud Prevention
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