Add Deferred Revenue / Deferred Expense to Journal Entries

[ernestoruiz89]

Currently, ERPNext allows users to record deferred expenses/deferred income through specific invoice-based entries, either from purchase or sales invoices. This functionality is incredibly useful for accurate financial reporting and matching expenses with revenue generation. However, this feature is not available in the Journal Entry module, which restricts flexibility in accounting practices.

I propose the extension of deferred expense/income expense recording capabilities to Journal Entries. This would allow users to record directly in the Journal Entry module, enhancing ERPNext's usability and accommodating a broader range of accounting scenarios.

[agritheory]

@ernestoruiz89 What is use case for this? One that would not be a appropriately accommodated by a Purchase Invoice or Sales Invoice?

It goes against best practices to use the Journal Entry for recording ordinary expenses; the recommended approach is to use non-inventoriable item(s). I'm not saying that this feature shouldn't be developed, but I don't agree with the premise that it would be good to have this feature to "allow users to record deferred expenses directly in the Journal Entry".

[ernestoruiz89]

@ernestoruiz89 What is use case for this? One that would not be a appropriately accommodated by a Purchase Invoice or Sales Invoice?

It goes against best practices to use the Journal Entry for recording ordinary expenses; the recommended approach is to use non-inventoriable item(s). I'm not saying that this feature shouldn't be developed, but I don't agree with the premise that it would be good to have this feature to "allow users to record deferred expenses directly in the Journal Entry".

Hello,

Many accountants are accustomed to traditional accounting practices where journal entries are the primary method for recording all financial transactions, rather than using the entire ERP system

Companies sometimes need to make accrual adjustments that are not directly linked to any purchase or sales invoice, like adjustments, a company may need to defer the recognition of revenue received in advance for a service that will be delivered over several months. This type of adjustment may not always align neatly with the transactions recorded via invoices.

Also, handling the opening of accounts via journal entries that include balances of deferred expenses or revenues.

This feature could be enabled in the accounting settings and not be set as default.

[agritheory]

Many accountants are accustomed to traditional accounting practices where journal entries are the primary method for recording all financial transactions, rather than using the entire ERP system

I hear this one all the time. "This is how QuickBooks does it" doesn't mean that it's good accounting practices and I would especially caution those coming from a cash basis, casual accounting or bookkeeping background that ERPNext is a stockkeeping system first, which drives its accounting features. ERPNext is very poor choice if your accounting requirements are closer to "balance the checkbook" than "monitor change in inventory valuation". Workflows that disregard inventory accuracy for the convivence of the accounting team are at best, sloppy, and at worst, negligence or fraud. Because ERPNext or any other accounting system allows you to enter ordinary expenses as a Journal Entry does not mean that its a good idea.

Companies sometimes need to make accrual adjustments that are not directly linked to any purchase or sales invoice, like adjustments, a company may need to defer the recognition of revenue received in advance for a service that will be delivered over several months. This type of adjustment may not always align neatly with the transactions recorded via invoices.

While this is certainly true and I have advised many such adjustments myself, I do not see how it is appropriate for a transaction that has an ongoing deferral mechanic. Deferred transactions are applied iteratively, as they accrue at the time/ in the period that they represent. If those values change each period/ iteration, I would argue that using the deferred feature was not the correct choice in the first place. If you make a mistake on a deferred entry, you can make a single adjusting JE, end the deferral and start the new sequence from there. It does not require that all future iterations in the deferral sequence are fixed - they haven't happened yet. Tracking N diverging sources of truth is never better than tracking one. This feature would introduce such an issue even if it were only used (via policy) as a correctional technique.

handling the opening of accounts via journal entries that include balances of deferred expenses or revenues.

I never advise using a Journal Entry for opening balances on accounts that use a subledger -it creates a matching problem that can only be solved in the margins and that reconciliation document never seems to make its way into the accounting system and always seems to escape the auditors attention. I advocate for using correctly dated invoices with their full detail for opening. In a scenario where one company is acquiring another and it would be incorrect to have transactions dated before the acquisition date, I still advocate for creating those opening invoices with full detail and then offsetting those with Journal Entries against the whatever the appropriate balance sheet account is, if that's required (it's more correct, but may not be material).

This feature could be enabled in the accounting settings and not be set as default.

It is my opinion that this feature should not exist at all. I know that you disagree and I respect that. I don't consider what you're asking for "wrong", I just think it's a very problematic approach. I wanted to say it firmly here, for the record.

Please consider all of this explanation as an effort on my part to convince you to stop entering ordinary expenses as Journal Entries in the first place. I think it has too many disadvantages to be the correct procedure. In the accounting laws and conventions of the jurisdictions I consult in, Journal Entries are not and should not be used ordinary expense and will invite negative attention during an audit. Notably exceptions are imports from a payroll processing service, but that's commoditized, outsourced accounting functions, not what we're talking about here.

[ernestoruiz89]

Thank you for sharing your perspective.

I understand your concerns about using journal entries for recording ordinary expenses in ERPNext, given its focus on inventory management. It’s clear that for accurate financial reporting and inventory tracking, adhering to best practices is crucial.

However, for non-inventory related transactions or complex financial environments, some flexibility in recording methods might still be necessary. Your emphasis on using detailed invoices for opening balances and caution against altering default settings for ordinary expenses is well-noted and reflects a prudent approach to financial management

I understand your strong stance against implementing the feature, it might be beneficial to have a configurable option, as suggested, where such features are not default but available for activation based on specific accounting needs or contexts. This could provide the necessary flexibility for businesses with unique requirements without altering the standard practices recommended for most users.

Your insights are invaluable, and discussing these different perspectives helps in understanding the complexities of accounting practices. Your approach to caution and accuracy is crucial for maintaining integrity and compliance. Thank you for emphasizing these points.