Blog Post
Introduction
For those companies who operate on an accrual basis, accounting for sales made today for future services can be challenging. This is especially true for software companies that sell annual subscription plans. There are a few ways you can accomplish this on Commerce today.
The first option will require more work on your part to determine what amount of deferred revenue to recognize each month. The second option will require more up front setup, but ultimately will allow you to better track and definitively recognize the appropriate amount of deferred revenue each month.
Option 1, map your deferred revenue to a single account
The first option would require that you create a separate Deferred Revenue liability account within your accounting file's chart of accounts and book all your deferred revenue to that account. Here are the steps necessary to accomplish this:
Create a deferred revenue liability account within your accounting file's chart of accounts.
Ensure that you are using product SKUs within your accounting file to track your itemized sales.
Ensure you have separate Product/Services configured for both monthly and yearly sales. Your yearly sales will need to "map" to the deferred revenue liability account.
Ensure that are using "itemized exports" when exporting data from Commerce to an accounting file. Learn more about itemized exports.
Ensure that you utilizing SKU matching when exporting data from Commerce to an accounting file. Learn more about SKU matching.
When exporting data from Commerce to accounting, you should now see annual subscriptions map to the appropriate Product/Service associated with your deferred revenue liability account.
Now that you have booked the revenue accordingly, you can choose to perform a journal entry each month to recognize a portion of the deferred revenue.
Option 2, map your deferred revenue to a deferred revenue liability account by month (requires a Commerce premium plan)
The second option would require that you create separate Deferred Revenue liability accounts for each month within your accounting file's chart of accounts. Commerce will then map your sales to the appropriate liability account based on the month the sales was made. Here are the steps necessary to accomplish this:
Contact us to activate a Commerce Premium plan.
Contact Commerce to implement a Deferred Revenue Transform. Learn more about transforms.
Create deferred revenue liability accounts for each month within your accounting file's chart of accounts.
Ensure that you are using product SKUs within your accounting file to track your itemized sales.
Ensure you have separate Product/Services configured for both monthly and yearly sales. We suggest your yearly sales "map" to a general deferred revenue liability account despite the fact that Commerce will override this mapping based on the date of each sale.
Ensure that are using "itemized exports" when exporting data from Commerce to an accounting file. Learn more about itemized exports.
Ensure that you utilizing SKU matching when exporting data from Commerce to an accounting file. Learn more about SKU matching.
When exporting data from Commerce to accounting, you should now see annual subscriptions map to the appropriate deferred revenue liability account based on the month of the sale.
Now that you have booked the revenue accordingly, you can choose to perform a journal entry each month to recognize a portion of the deferred revenues.