Recognizing pre-paid revenue

Sequence allows you to collect payments in advance of providing services to your customers. This can be in the form of pre-paid credits for given services, or pre-paid minimum commitments to use your services. In either scenario, the revenue you collect precedes services being delivered, and thus must be held in a liability ledger account, and only recognized when the services have been delivered.

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Pre-paid minimum commitments

Pre-paid minimum commitments enable you to collect revenue in advance of providing services to your clients. You may or may not elect to cap their usage or charge “overages” when they exceed some threshold, but in either case, the money collected in-advance cannot be recognized immediately.

Sequence uses the total amount and the service period to accurately calculate the amount of revenue that should be recognized each month, using straight-line recognition, and uses Actual/Actual day count convention to allocate revenue across multiple months.

Let us take an example of £3000 quarterly charge running for a full calendar year. This means that Sequence will collect £3000 four time a year, in January, April, July and October - as follows:

Sequence’s revenue recognition engine will recognize the revenue as follows:

The calculated recognized revenue is then used to post a manual journal, dated on the last day of each month, moving the revenue from a pre-selected deferred income liability account, into a sales income account.

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Pre-paid credits

The other way you can collect revenue in advance is by selling pre-paid credits for given services. In this scenario, revenue is recognized as these services are consumed, which isn’t known in advance. Therefore predictable, straight-line recognition strategy isn’t valid here.

Instead, Sequence tracks credit consumption for each billing period, and uses that to calculate the amount of revenue that should be recognized for that period.

Let us take an example where you sold 500 API Call Credits for £1000. Sequence calculated that each API Call Credit is worth £2 at the point of consumption, and will use that to calculated amount to recognize, as follows:

The calculated recognized revenue is then used to post a manual journal, dated on the last day of each month, moving the revenue from a pre-selected deferred income liability account, into a sales income account.

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Selecting income vs. deferred income ledger accounts

In order for Sequence to post the manual journal entries, it needs to know which account to initially move invoices, pre-paid revenue into, as well as which ledger account to move deferred revenue into once services are delivered. There are multiple ways you can associate your revenue with a liability account:

You can select a default liability account for all revenue charges in advance in your ERP integration setting. This will ensure that all revenue that is charged in advance will be associated with the selected liability account. Customers using Xero will typically use account 810 for deferred income liability.

This is the recommended approach as it will apply to all your in-advance charges.

Alternatively, you can select the account either at the point of creating a price in Sequence, or when reviewing an invoice by associating the line item with the desired ledger account.