documentation/content/applications/finance/accounting/vendor_bills/deferred_expenses.rst

=================
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 :guilabel:`Draft` to :guilabel:`Posted`.

Configuration
=============

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

Journal
  The deferral entries are posted in this journal.
Deferred Expense Account
  Expenses are deferred on this Current Asset account until they are recognized.
Deferred Revenue Account
  Revenues are deferred on this Current Liability account until they are recognized.
Generate Entries
  By default, Odoo :ref:`automatically generates <vendor_bills/deferred/generate_on_validation>`
  the deferral entries when you post a vendor bill. However, you can also choose to
  :ref:`generate them manually <vendor_bills/deferred/generate_manually>` by selecting the
  :guilabel:`Manually & Grouped` option instead.
Amount Computation
  Suppose a bill of $1200 must be deferred over 12 months. The :guilabel:`Equal per month`
  computation recognizes $100 each month, while the :guilabel:`Based on days` computation recognizes
  different amounts depending on the number of days in each month.

.. _vendor_bills/deferred/generate_on_validation:

Generate deferral entries on validation
=======================================

.. tip::
   Make sure the :guilabel:`Start Date` and :guilabel:`End Date` fields are visible in the
   :guilabel:`Invoice Lines` tab. In most cases, the :guilabel:`Start Date` should be in the same
   month as the :guilabel:`Bill Date`. Deferred expense entries are posted from the bill 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 :guilabel:`Generate Entries` field is set to :guilabel:`On invoice/bill validation`, Odoo
automatically generates the deferral entries when the bill is validated. Click on the
:guilabel:`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 :menuselection:`Accounting --> Reporting --> Deferred Expense`.

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

.. image:: deferred_expenses/deferred_expense_report.png
   :alt: Deferred expense report

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

.. _vendor_bills/deferred/generate_manually:

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 :guilabel:`Generate Entries` field in the
**Settings** to :guilabel:`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
:guilabel:`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 two bills:

   - 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

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

      - Entry 1 dated on the 31st January:

        - Line 1: Expense account -1200 -600 = **-1800** (cancelling the total of both bills)
        - Line 2: Expense account 100 + 50 = **150** (recognizing 1/12 of bill A and bill B)
        - Line 3: Deferred account 1800 - 150 = **1650** (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 **1800**
        - Line 2: Deferred account **-150**
        - Line 3: Expense account **-1650**

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

      - Entry 1 dated on the 28th February:

        - Line 1: Expense account -1200 -600 = **-1800** (cancelling the total of both bills)
        - Line 2: Expense account 200 + 100 = **300** (recognizing 2/12 of bill A and bill B)
        - Line 3: Deferred account 1800 - 300 = **1500** (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 October
      The same computation is done for each month until October.

   In November
      At the end of November, after clicking the :guilabel:`Generate Entries` button,
      there are the following entries:

      - Entry 1 dated on the 30th November:

        - Line 1: Expense account -1200 -600 = **-1800** (cancelling the total of both bills)
        - Line 2: Expense account 1100 + 550 = **1650** (recognizing 11/12 of bill A and bill B)
        - Line 3: Deferred account 1800 - 1650 = **150** (amount that has yet to be deferred later
          on)

      - Entry 2 dated on the 1st December, the reversal of the previous entry.

   In December
      There is no need to generate entries in December. Indeed, if we do the computation for
      December, we will have an amount of 0 to be deferred.

   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

      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.