Deferred expenses

Deferred expenses and prepayments (also known as prepaid expenses) are both costs that have already occurred for products or services yet to be received.

Such costs are assets for the company that pays them since it already paid for products and services but has either not yet received them or not yet used them. The company cannot report them on the current profit and loss statement, or income statement, since the payments will be effectively expensed in the future.

These future expenses must be deferred on the company’s balance sheet until the moment in time they can be recognized, at once or over a defined period, on the profit and loss statement.

For example, let’s say we pay $1200 at once for one year of insurance. We already pay the cost now but haven’t used the service yet. Therefore, we post this new expense in a prepayment account and decide to recognize it on a monthly basis. Each month, for the next 12 months, $100 will be recognized as an expense.

Odoo Accounting handles deferred expenses by spreading them across multiple entries that are posted periodically.

Note

The server checks once a day if an entry must be posted. It might then take up to 24 hours before you see a change from Draft to Posted.

Configuration

Make sure the default settings are correctly configured for your business. To do so, go to Accounting ‣ Configuration ‣ Settings. The following options are available:

Journal

The deferral entries are posted in this journal.

Deferred Expense

Expenses are deferred on this Current Asset account until they are recognized.

Generate Entries

By default, Odoo automatically generates the deferral entries when you post a vendor bill. However, you can also choose to generate them manually by selecting the Manually & Grouped option instead.

Based on

There are three ways to calculate the deferred expenses recognition:

  • Days: The total amount is divided equally by the total number of days in the period, inclusive of the start and end dates.

  • Months: Each full month represents an equal proportion of the total amount, regardless of the actual number of days in that month (standardized basis).

  • Full Months: Any month started is treated as a complete month. However, the final month is only considered full if the period extends to the very last day of that month.

Suppose a bill of $1200 must be deferred over 12 months.

  • The Days option accounts for different amounts depending on the number of days in each month (e.g., ~$102 for January and ~$92 for February).

  • The Months option accounts for $100 each month prorated to the number of days in that month (e.g., $50 for the first month if the Start Date is set to the 15th of the month).

  • The Full Months option considers each month started to be full (e.g., $100 for the first month even if the Start Date is set to the 15th of the month); this means that with the Full Months option, a full $100 is recognized in the first partial month, eliminating the need for a 13th month to recognize any remainder as would be the case when using the Months option.

Generate deferral entries on validation

Tip

Make sure the Deferred Date field is visible in the Invoice Lines tab. In most cases, the start of the deferred period should be in the same month as the Accounting Date. Deferred expense entries are posted from the accounting date and are displayed in the report accordingly.

For each line of the bill that should be deferred, specify the start and end dates of the deferral period.

If the Generate Entries field is set to On invoice/bill validation, Odoo automatically generates the deferral entries when the bill is validated. Click on the Deferred Entries smart button to see them.

One entry, dated on the same day as the bill’s accounting date, moves the bill amounts from the expense account to the deferred account. The other entries are deferral entries which will, month after month, move the bill amounts from the deferred account to the expense account to recognize the expense.

Example

You can defer a January bill of $1200 over 12 months by specifying a start date of 01/01/2023 and an end date of 12/31/2023. At the end of August, $800 is recognized as an expense, whereas $400 remains on the deferred account.

Reporting

The deferred expense report computes an overview of the necessary deferral entries for each account. To access it, go to Accounting ‣ Reporting ‣ Deferred Expense.

To view the journal items of each account, click on the account name and then Journal Items.

Deferred expense report

Note

Only bills whose accounting date is before the end of the period of the report are taken into account.

Generate grouped deferral entries manually

If you have a lot of deferred revenues and wish to reduce the number of journal entries created, you can generate deferral entries manually. To do so, set the Generate Entries field in the Settings to Manually & Grouped. Odoo then aggregates the deferred amounts in a single entry.

At the end of each month, go to the Deferred Expenses report and click the Generate Entries button. This generates two deferral entries:

  • One dated at the end of the month which aggregates, for each account, all the deferred amounts of that month. This means that at the end of that period, a part of the deferred expense is recognized.

  • The reversal of this created entry, dated on the following day (i.e., the first day of the next month) to cancel the previous entry.

Example

There are three bills deferred based on Months:

  • Bill A: $1200 to be deferred from 01/01/2023 to 12/31/2023

  • Bill B: $600 to be deferred from 01/01/2023 to 12/31/2023

  • Bill C: $600 to be deferred in a future period (it will appear on the Not Started column)

In January

At the end of January, after clicking the Generate Entries button, there are the following entries:

  • Entry 1 dated on the 31st January:

    • Line 1: Expense account -1200 -600 -600 = -2400 (cancelling the total of all bills)

    • Line 2: Expense account 100 + 50 = 150 (recognizing 1/12 of bill A and bill B)

    • Line 3: Deferred account 2400 - 150 = 2250 (amount that has yet to be deferred later on)

  • Entry 2 dated on the 1st February, the reversal of the previous entry:

    • Line 1: Expense account 2400

    • Line 3: Expense account -150

    • Line 2: Deferred account -2250

In February

At the end of February, after clicking the Generate Entries button, there are the following entries:

  • Entry 1 dated on the 28th February:

    • Line 1: Expense account -1200 -600 -600 = -2400 (cancelling the total of all bills)

    • Line 2: Expense account 200 + 100 = 300 (recognizing 2/12 of bill A and bill B)

    • Line 3: Deferred account 2400 - 300 = 2100 (amount that has yet to be deferred later on)

  • Entry 2 dated on the 1st March, the reversal of the previous entry.

From March to November

The same computation is done for each month until November.

In December

There is no need to generate entries in December.

In total

If we aggregate everything, we would have:

  • Bill A and Bill B

  • Two entries (one for the deferral and one for the reversal) for each month from January to November

  • Bill C will be deferred later

Therefore, at the end of December, bills A and B are fully recognized as expense only once in spite of all the created entries thanks to the reversal mechanism.