Definition of Deferrals
Deferrals refer to accounting adjustments where the recognition of revenue or expenses is postponed to a later period. This ensures accurate financial reporting by matching income and expenses with the period in which they are incurred or earned.
Deferred Revenue: Payments received in advance for goods or services not yet delivered or performed. It is a liability until the goods or services are provided.
Deferred Expenses: Costs paid in advance for goods or services that will benefit future periods. These are recorded as assets and expensed over time.
Why Are Deferrals Important?
Deferrals ensure compliance with the Matching Principle of Accounting, which states that Expenses should be Recorded in the same period as the Revenues they help generate. This prevents Overstatement/ Understatement of Financial Performance.
Examples with Journal Entries
1. Deferred Revenue (Liability)
Scenario: A company receives $12,000 in advance on January 1 for a one-year subscription.
Initial Entry (on receiving payment):
Debit: Cash $12,000
Credit: Deferred Revenue (Liability) $12,000
Monthly Adjustment (recognizing $1,000 revenue per month):
Debit: Deferred Revenue $1,000
Credit: Sales Revenue $1,000
By December 31, the entire $12,000 will be recognized as revenue, and the deferred revenue account will be zero.
2. Deferred Expense (Asset)
Scenario: A company pays $3,000 in advance on January 1 for a three-month insurance policy.
Initial Entry (on payment):
Debit: Prepaid Insurance (Asset) $3,000
Credit: Cash $3,000
Monthly Adjustment (recognizing $1,000 expense per month):
Debit: Insurance Expense $1,000
Credit: Prepaid Insurance $1,000
By March 31, the prepaid insurance account will be zero, and the expense will be fully recognized.
Key Points to Remember
Deferred Revenue is a liability because the company owes goods or services to the customer.
Deferred Expenses are assets initially because they provide future economic benefits.
Regular adjustments ensure that financial statements accurately reflect income and expenses for each period. This method ensures that both revenues and expenses are aligned with the appropriate periods, providing a true picture of financial performance.
Recording Deferrals in Business Central
First you have to create a Template that what pattern needs to Follow for the Transaction.
1- Click the search button or Alt+Q on the application bar, enter Deferral Template, and then choose the related link.
2- From the Deferral Templates page, Click New to Create New Template.
General
Enter the deferral Code e.g., 12M and it's Description is 12 months deferral.
Deferral Account - Specifies the G/L account that the Deferred Expenses /Revenue are posted to. (Example: Prepayment Asset, Accrued Revenue or Prepaid Expenses)
Deferral Schedule
In the Deferral Schedule, enter the
Deferral Percentage - Specifies how much of the total amount will be deferred.
No. of Periods - Specifies how many accounting periods the total amounts will be deferred to. In this Case it is 12 months and the code should be like 12. Don't mention M/D/Y or any code like that. The calculation it performs is like Year/ (Period), 1 Year/12 = 1 Month
Calculation Method
Specifies how the Amount field for each period is calculated.
Straight-Line: Amount is spread based on the length of each period (e.g., longer months get more).
Equal per Period: Amount is split equally across all periods, regardless of their length.
Days per Period: Amount is divided based on the exact number of days in each period.
User-Defined: You manually set the amount for each period instead of an automatic calculation.
This helps control how the deferred amounts are allocated over time.
Start Date
Specifies when to start Calculating Deferral Amounts. Here’s an easy explanation of the 5 types of Start Date options in the Deferrals Template:
Posting Date: The Deferral Starts from the Date of Transaction. Example: If you post an invoice on 15-Mar-24, the deferral starts on that Exact Date.
Beginning of Period: The deferral starts from the first day of the month or period in which the transaction occurs. Example: If you post on March 15, 2024, the deferral starts on March 1, 2024.
End of Period: The deferral starts from the last day of the month or period in which the transaction occurs. Example: If you post on March 15, 2024, the deferral starts on March 31, 2024.
Beginning of Next Period: The deferral starts from the first day of the following month or period. Example: If you post on March 15, 2024, the deferral starts on April 1, 2024.
Beginning of Next Calendar Year: The deferral starts from the first day of the next year. Example: If you post on March 15, 2024, the deferral starts on January 1, 2025.
Period Description
Period Description - In the Period Description field, specify a description that will be shown on entries for the deferral posting. You can enter the following placeholder codes for typical values, which will be inserted automatically when the period description is displayed.
%1 = The day number of the period posting date
%2 = The week number of the period posting date
%3 = The month number of the period posting date
%4 = The month name of the period posting date
%5 = The accounting period name of the period posting date
%6 = The fiscal year of the period posting date
Example: The posting date is 02/06/2016. If you enter “Expenses deferred for %4 %6”, then the description displayed will be "Expenses deferred for February 2016".
Deferral Template In General Journal
Open the General Journal and there is a Field that is linked with Deferral Code
Deferral Code: Specifies the Deferral Template that Governs how expenses or revenue are deferred to the different accounting periods when the expenses or revenue were incurred.
I entered an amount of 12,000 and allocated it evenly over 12 months using deferrals. To review the allocation, we can analyze the Deferred Schedule, which provides a detailed breakdown of the postings across the specified periods.
A new Window will Open.
From the Deferred Schedule, you can review the calculated values based on the selected method and other parameters, ensuring the allocation aligns with your settings. The value will change with respect to method and methods are explained above. And if we do the Preview Posting then you can see the Entries.
List of Entries:
01/09/2024 Delivery Expenses 12,000
01/09/2024 Delivery Expenses -12,000
01/09/2024 Deferred Expenses 12,000
01/09/2024 Bank -12,000
01/09/2024 Delivery Expenses 12,000
01/09/2024 Deferred Expenses -12,000
If the entries are all as per your Requirement, then Simply just Post it.
Deferrals Template on G/L Account | Resources | Item Card
We can attach the Deferral Template on the Item Card.
Choose the icon, enter G/L Account, Resources & Items, and then choose the related link.
Open the card for the G/L Account, Resources & Item for which Revenues or Expenses must be deferred to the Accounting Periods when the item was sold or purchased.
On the Card you will find a Field name in "Default Deferral Template" field, select the relevant deferral template.
Deferrals in Sales Invoice
We can attach the Deferral Code in the Sales Invoice Line Level.
Create a Sales Invoice
Create a new sales invoice for an item, resource, or G/L account that has a deferral template assigned.
When you add the item (or resource or G/L account) to the invoice line, the Deferral Code field automatically fills with the template's code.
Access the Deferral Schedule
Click the Deferral Schedule action on the sales invoice page.
On the Deferral Schedule page, update the header or line details as needed (In a Similar Manner as Discussed in the General Journal Part):
Adjust the deferral period or amounts to include additional accounting periods.
Recalculate the Schedule
Click the Calculate Schedule action to apply your changes.
Click OK to update the deferral schedule for the sales invoice.
Note: The original deferral template remains unchanged and I showed you the Process for Sales. For Purchases the concept is Same.
Specify a Period for Allowing Deferral Posting
Open General Ledger Setup or User Setup.
Set the Deferral Posting Period
Locate the Allow Deferral Posting From and Allow Deferral Posting To Fields.
Enter the start date and end date to define the deferral posting period.
This setup ensures controlled posting flexibility while maintaining overall accounting period restrictions.
Open the G/L Deferral Summary Report and apply the filter if required.
Preview the Report
This report helps track deferred posted entries for better financial oversight.
I hope you find this article helpful.
Best Regards,
Ahmad Subhani
D365 Business Central Functional Consultant
Email - ahmadsubhani424@gmail.com
WhatsApp - +923357687164
If you want to see all this in a Video, Then Click on the Link below.
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