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How Subscription-Based Businesses Manage Deferred Revenue
December 9, 2021
Correctly managing, analyzing and reporting deferred revenue is one of the most important aspects of running a subscription business. Although deferred revenue is a liability on the balance sheet, it is the best predictor of future earnings. A growing deferred revenue balance means that your company has increased its sales and obligations to serve products to its customers. Companies can consistently plan to recognize a pro-rata share of deferred revenue each month as income, making this a great tool for projecting and budgeting your future income.
When using Multipub, companies can set-up the system to work best for their businesses. They can establish policies to earn revenue on all orders or just paid orders. They can also defer miscellaneous charges, postage and taxes and specify General Ledger (GL) accounts for these deferred charges, if preferred.
Key Deferred Revenue Features
- The Chart of Accounts, or list of General Ledger accounts with their account numbers and descriptions, is defined for all accounts, including the various income and deferred income accounts.
- Each GL account can have a mapping to the account number that is used in the company-wide GL package. This interface code can have a completely different schematic and naming convention than the account numbers in Multipub. The Multipub account numbers have a 6-digit main account number and a 6-digit sub-account number, i.e. the Income Account for product code “ABC” = 005300-01999. But, if your accounting package (Quickbooks, Sage, Netsuite, etc.) has a different structure, it can be specified in the Interface Code setup, i.e. ABC-005-300-1999. This will enable the Multipub GL interface to post the data to the correct account in the accounting package.
- The Deferred Income Reports show both short-term and long-term deferred. (Short-term is anything that will be earned in the next 12 months, and long-term is anything that will be earned in 12 months and beyond.) The detailed deferred report provides the amount of deferred revenue for each order, whereas the summary report provides the total by product.
- The Detailed Earned Income Report provides the income earned for each order, and it also includes many demographic fields in the ASCII output. This gives the user the ability to analyze the earned revenue by customer type, area of interest, distribution format, entity/BillTo, city, state, country, new/renewal, and more.
How Deferred Revenue Works in Multipub
As orders are entered, entries are made to the appropriate GL accounts. If the order hasn’t been fulfilled yet, the entire sales amount is posted to the deferred revenue account. Then, as issues or products are fulfilled, the system automatically recognizes the revenue by posting the credit to the earned income account and the debit to the deferred income account.
For access day or time-based subscriptions (typically for online products), revenue recognition can be run manually or automated either at period-end or nightly to earn revenue for those days of served content/access. Based on the selections made, the system earns revenue for these products by posting the credit to the earned income and debit to the deferred income account. As order adjustments are entered, GL entries are made for the necessary amounts to the general ledger.
When processing month-end in Multipub, the user will run a deferred revenue report and a general ledger distribution report. The system will analyze all the journal entries and the deferred revenue balances and provide a month-end balancing report. If the system encounters an out-of-balance condition (which occurs rarely, but happens if users post outside the period or use other ways of “tricking” the system), Multipub will provide you with the detailed information for the order that caused the out-of-balance condition.
The general ledger distributions can be fed to your company-wide accounting system on a manual or automated basis. This integration can be done via flat file exports or API (only available for some accounting systems.) This enables Multipub to manage your earned and deferred income, but all the data then can flow to your General Ledger package for financial reporting and analysis.