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How to eliminate the headache of month-end journal entries for prepaid expenses and deferred revenue

September 3, 2020Cynthia Priebe

If you are the accounting pro responsible for month-end close, you probably are responsible for making monthly entries moving amounts from prepaid expense or deferred revenue accounts to recognized expense or revenue accounts. You might have a spreadsheet to help you keep track or are using recurring journals to get this work done. What if I told you that there is a way to automate all this, so you can eliminate the headache of these monthly entries completely and still get the desired results?

It’s true! Business Central gives you the ability to post invoices for prepaid expense or deferred revenue with the recognition entries in the future all in one step. Eliminate those month-end journal entries!

It really is as easy as 1, 2, 3! Let’s get started…

1) The first thing you must do is create deferral templates for each recognition schedule. You may find that you can create generic schedules (deferral template) for each recognition type and period, or you may create one specific to each payment or revenue type to defer. There is no limit to the number of deferral templates you can create.

a. Use Tell me.. or Explorer to find Deferral Templates.

month-end journal entries

b. Assign an intuitive code and description to the template. The code in this example could be used for any 6-month insurance deferral with the same deferral requirements.

c. Assign the correct Deferral Account. This is the balance sheet account you normally post the total amount to defer. Prepaid Insurance has been selected.

d. Deferral % indicates how much of the invoiced amount will be deferred.

e. Calc. Method offers several options. I selected Equal per Period, this is calculated according to the number of periods, distributed evenly on periods.

f. Start Date determines when the first recognition entry will be posted. For example, if you receive an insurance invoice in the month prior to the first recognition entry, you might select Beginning of Next Period for this schedule.

g. Use Period Desc. to automate what appears in the description for each of the recognition entries by using placeholder codes to represent values, or type in a static description. The description in the screenshot above will produce the following for each entry “Prepaid Insurance for <Month name of the period posting date> <The fiscal year of the period posting date>.”

h. More information on setting up deferral templates including calculation methods and placeholder codes can be found at https://docs.microsoft.com/en-us/dynamics365/business-central/finance-how-defer-revenue-expenses

2) Now that you have completed the required setup, it is just a matter of entering purchase invoices using the deferral code. (Most users will find that personalizing the purchase lines to add the Deferral Code field is needed the first time you do this.)

a. Enter a purchase invoice for the insurance expense.

i. Select vendor and fill the majority of invoice fields as usual.

ii. However, instead of selecting the prepaid insurance account on the purchase line, select the insurance expense G/L account.

iii. Next, select a Deferral Code on the purchase line.

month-end journal entries

b. Prior to posting you can preview what will be posted including the schedule and values that will be used for the monthly recognition entries.

i. Go to Line -> Related Information -> Deferral Schedule.

month-end journal entries

ii. Based on the deferral code, posting dates and amounts are determined. Note the posting dates beginning with the first date in the next period and the description including month and year.

iii. You may need to request your allowable posting date range be opened into the future to post deferrals. If you do not have permission to post into the future periods in the schedule, you will get a posting date range error.

iv. You can adjust the schedule for this invoice and see the results by clicking on Calculate Schedule. Changing the Calc. Method to Days per Period nets this result.

month-end journal entries

v. Revert to the original schedule by changing Calc. Method back to Equal per Period and calculate again.

vi. Use Preview Posting to see the general ledger entries that will be posted. Sort by posting date ascending to make it easier to see the entries in the order they will affect account balances.

3) Post the purchase invoice. That’s all there is to it!

Now open the Posted Purchase Invoice to see the posted general ledger entries using Navigate.

Oh no, there are only 4 G/L entries! What happened to all the recognition entries? Just clear the Posting Date from the header, then click on Find. This will update Navigate to include all GL Entries related to the document regardless of date.

The No. of Entries for G/L Entry has been updated.

Drill down to see original and recognition entries based on the deferral schedule. Sort by posting date.

So, there you have it! And, the same process applies to sales invoices for deferred revenue.

There is nothing wrong with posting invoices to prepaid accounts and then month after month logging journal entries to recognize the expense or revenue. But I think you will agree, the “righter” way may just be to set up and use Deferral Templates. Just one more way Business Central helps to automate your finance activities!

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The experts at New View Strategies are experienced Dynamics NAV and Business Central trainers and business process consultants who have walked in your shoes as former Corporate Controllers, Directors of IT, and Solution Architects, and believe increased utilization of your business systems is critical to the continued success of your company.
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