Deferring an annual invoice with month-end journals
How a software company spreads an annual upfront invoice over the months it covers, using a deferred revenue account and a monthly release journal.
By Achekam · · 4 min read · For Software (SaaS) businesses in South Africa, Nigeria, Kenya
Your sales lead closes an annual deal with a mid-sized customer, and the finance team issues one invoice for the full year's licence in the first month. In the books, the whole amount is now sales. That month's income statement shows a spike, and the rest of the year shows nothing from that customer at all, although your engineers support them every single day.
Nothing is wrong with the invoice. What is missing is the step that spreads its revenue over the months the customer is actually served. Until Achekam's books do this for you, it is a short monthly routine with two journals and one new account, and this article walks through it.
Invoiced is not the same as earned
An annual licence is a promise to provide the software for a year. On the day you invoice, you have earned none of it; by the end of the first month you have earned one month's worth; by the end of the year, all of it. The part not yet earned is a liability, usually called deferred revenue or a contract liability: the value of service you still owe.
ACCA's article on IFRS 15 contract assets and contract liabilities explains the balances that arise when revenue is recognised before or after a customer pays. Your accountant will decide how the standard applies to your contracts; the routine below is how to put that decision into the books.
A deferred revenue account in the chart
Each business in Achekam has its own double-entry ledger with a standard chart of accounts, and accounts can be added, renamed or switched off. Add a liability account called Deferred revenue, or Contract liabilities if your accountant prefers that name. If you sell different products on annual terms, one deferred account per product line makes the monthly check easier.
While you are in the chart, note where your invoices post. Issuing a customer invoice posts debtors, sales and output VAT, and at the time of writing all invoice revenue goes to one account, Professional Services Revenue (4100). Your deferral journals will therefore move revenue out of, and back into, that account.
Moving the invoice's revenue to deferred revenue
On the day the annual invoice is issued, post a manual journal that moves the whole of its revenue, excluding VAT, from Professional Services Revenue to Deferred revenue:
- debit Professional Services Revenue with the annual licence amount, excluding VAT;
- credit Deferred revenue with the same amount.
Leave the debtor and the output VAT alone. The customer still owes the full invoice, and VAT follows the invoice rather than your deferral. When VAT falls due on an annual invoice is a question for your country's VAT rules and your accountant, not for this journal.
A journal that does not balance is refused, and so is one dated in a closed month. Put the contract reference in the description, so anyone reading the general ledger can trace the entry to the order form.
The monthly release journal
At each month end, release the share that the month has earned:
- debit Deferred revenue with one month's share;
- credit Professional Services Revenue with the same amount.
For a licence that starts on the first day of a month, that is an equal share every month. For one that starts mid-month, agree a rule with your accountant: a part-month share in the first month, or starting the release the following month, applied the same way every time.
Keep a simple schedule beside the books, one row per annual contract:
| Contract | Start | End | Annual amount excl. VAT | Released to date | Still deferred |
|---|
Each month, add up the releases due from the schedule and post one release journal for the total, or one per contract if you prefer the detail in the ledger. Either way, management accounts now show an income statement for the month, beside the month before, with the revenue the month actually earned.
Closed months, and corrections by reversal
Months in Achekam can be soft-closed, hard-closed and locked, and a closed month refuses postings from every source. Post the month's release before closing it. If you forget, the release goes into the next open month with a note, rather than reopening a hard-closed month, which needs a second approver.
A posted journal is corrected only by reversing it and posting the right one. If a release used the wrong amount, reverse that journal and post the corrected one. The ledger then shows both the mistake and the fix, which is what an auditor wants to see.
When a customer cuts seats mid-term and you issue a credit note, the deferred balance for that contract has to come down as well, by a journal that matches the credit; credit notes when a customer reduces seats covers the credit note side.
Checking the deferred balance against open contracts
Once a month, before closing, compare two figures:
- The Deferred revenue balance in the trial balance at the month-end date.
- The total of the "Still deferred" column in your schedule.
They should agree. If the ledger is higher, a release has been missed. If it is lower, a deferral journal is missing for a new invoice, or a release was posted twice. The general ledger lists every posted line, so you can find the culprit by reading the account's movements against the schedule.
The same discipline applies to costs paid in advance; month-end accruals shows the mirror image on the expense side.
Getting it running
Add the account, build the schedule from every annual invoice still running, and post a catch-up journal so the deferred balance matches the schedule from this month on. After that, the release is a short, routine job at each month end, and your monthly revenue line tells investors what the business really earned.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
