One of the most common search terms that brings people to my website is “Accruals Prepayments and Deferred Revenue”, and the search engine brings up many complicated answers, so I will attempt to bring an explanation in plain English for pre-payments and deferred revenue

A simple one line summary, they are just goods and services that have been paid for but not yet supplied

Lets look at a simple example that we all know, once a year we get the invoice for our car or household insurance, this will cover a period of 12 months, and we often pay this a few weeks before it starts, lets say our premium is 487.67 starts on the 15th January 2010 and we want to account for this, so we post the whole invoice value to the Insurance General Ledger Account on the 15th January 2010

First thing we do is to look at the the whole value a short term asset, as we have not had the services and if we cancel we will ask for a refund, the year is 12 months, and we have 11 full months and two part months so we divide the value by 12, giving us 11 at 40.64 and one at  40.63

In Dynamics NAV we could deal with this simply using a Recurring Journal with eight lines:

The first two lines deal with moving the whole value to a pre-payments account lets say that the premium is due on the 15th January 2010 and the invoice has been posted on this date, the first two line would take the whole 487.67 from the Insurance account and move it to the pre-payments account, the recurring type is variable, frequency ‘1M’ using the same document number and the Expiration Date would be the 16th January 2010 so it only runs once

The next two lines deal with the 17 days of January and would take 22.28 from the 40.63 (40.63 / 31 * 17) and post this from the pre-payments account to the Insurance account, the recurring type is variable, frequency ‘1M’ using the same date, document number and the Expiration Date would be the 16th January 2010 so it only runs once

The next two lines deal with the 11 Months of February to December and would take 40.64 and post this from the pre-payments account to the Insurance account, the recurring type is variable, starting date 1st February 2010, frequency ‘1M’ using the same document number and the Expiration Date would be the 2nd December 2010 so it only runs 11 times

The next two lines deal with the 14 days of January 2011 and would take the remaining 18.35 and post this from the pre-payments account to the Insurance account, the recurring type is variable, starting date 1st January 2011, frequency ‘1M’ using the same document number and the Expiration Date would be the 2nd January 2011 so it only runs 1 time

As for deferred revenue like support contract values received by your company for services not yet given, what we do here is to look at the the whole value as a short term liability, as we have not provided the services and if the customer were to cancel they would ask for a refund, we would follow the same process but using a deferred revenue account to hold the liability until realized

At any point in the year we can set a date filter and look at pre-payment and deferred revenue values as assets or liabilities