I have a customer that is wanting me to bill them for material we have not shipped them yet because they want to get the invoice in this months budget. The last company I worked for had a stringent
Invoicing A Customer Before You Deliver The Goods
Answers
If you invoice before you ship, you have unearned revenue.
When you ship, you have revenue and the associated CGS.
They (your customer), can receive the invoice and accrue it.
End result: a little more work for both of you, but your customer is happy and at the end of the day, that makes you happy.
But is it Sox Compliant and thanks so much for your help
Invoicing your customer prior to shipment shouldn't so much be a SOX issue so long as you have a procedure in place to properly address the specific matter. If you've invoiced the customer but have not shipped AND they have not paid, I'd argue that you have nothing at month/period end. I agree with Wayne that the easiest way to record it is to DR Deferred Revenue and CR Revenue, but at month/period end, I would reverse (or topside) off the whole thing. If you haven't shipped, then you have no revenue and if you haven't received payment, you have no revenue to defer. Even if they have paid, I would still reverse the revenue and just make it a pure balance sheet entry (DR Cash and CR Deferred Revenue or some other liability). My main point is that there is no revenue until you ship.
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Sorry but I have to disagree here...if you invoice but have not been paid (nor have you shipped), the associated JE should be Debit to AR, Credit to Deferred Revenue. At month end, there is nothing to reverse, as you are holding this on the balance sheet as a liability (deferred revenue), not showing it as revenue; this is offset by the AR, which is an asset. the effect to the P&L is zero, as both sides are balance sheet accounts, the effect to the balance sheet is also zero, because the asset and liability balance.
When the customer pays, you need two journal entries: DR Cash / CR AR (to receive the cash and relieve the AR) and DR Deferred Revenue / CR Revenue (to remove the liability and recognize the revenue). Should the customer choose not to pay, then simply reverse the initial JE (DR Deferred Revenue / CR AR) or issue a credit note to do so, giving you a complete audit trail.
The Revenue account should not be hit until you have delivered and have reasonable expectation of getting paid (per today's accounting standards) or if you are preparing for ASU 2014-09, when you have met the "performance obligation", again with expectation of getting paid.
We have a customer who at certain times of the year make the same request and we will process a Proforma invoice. Once the goods are shipped we convert the Proforma invoice into a true invoice.
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Great idea, produce a non-invoice (quote if you like) and not have to deal with any
Your customer is the one who is initiating incorrect accounting procedures. Booking an invoice before the goods are received - would love to hear them explain that one to the
Hi Mary Beth, I remember about 7 years ago @ my former employee, they stopped us from processing customer request for proforma invoices as we were told that SOX Compliance update was ...doesn't pass SOX Audit
So are proforma invoices still SOX Compliance, or was my previous company being overly cautious?
Maybe I'm overly cautious
Ok, so I want pose a few questions on this:
Does anyone here see a
The customer may have a "use it or lose it" policy relative to budgets each year, and want to spend down a current year surplus to keep next year's budget higher.
They may be trying to inflate inventory levels to meet certain working capital levels required by loan covenants.
The invoice cannot be for goods delivered, as they have not been shipped (nor title transferred to customer as far as we know here). So what will the invoice read? It seems to me that an invoice "selling materials" is different than an invoice for "a prepayment" for materials to be delivered.
Ignore SOX for now, look at law.
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Len -
Good points, and that can be addressed either with verbiage on the invoice stating estimated shipping date or using a clearly marked (thank you Anonymous) invoice that says Proforma.
Is this company a public company? If not, then there may be more flexibility, as SOX is for public companies.
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Hi Anon
If the true intention is to deceive, then I think SOX is a non issue.
Government agencies may be those who want to be invoiced early simply because they want to protect their budgets next year.
I'd love to see an auditor weigh in here on Elizabeth's question!!!
First, here is one glaring (at least to me) point to consider.........
"never issue an invoice before goods are received by the customer." << not necessarily true or even a rule. Transfer of ownership or billability (is that even a word?) is more nuanced than that.
Second, not sure if this is a one time thing or occurs frequently. There might be contract modification "workarounds".
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Given the speed at which invoices can now be sent (almost instantaneously), they tend to, in well run accounting shops, beat the shipment to the customer....
Respectfully disagree. I agree with you that the P&L effect is zero, but simply because the balance sheet effect "nets" to zero in no way means that there is no balance sheet effect. You are suggesting leaving a receivable on your balance sheet that the customer has no legal obligation to pay (you've only invoiced them for their convenience. You have not completed the revenue cycle and the invoice you sent does not create A/R that meets the definition of an asset) and you are creating a liability (the deferred revenue) that does not meet the definition of a liability. For bookkeeping entries, I agree the entries can be made so you can track it, but when it comes time to report, those entries improperly inflate your assets and liabilities.
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The above comment was in response to Neil's comment above, not a general "I disagree." Must have posted it in the wrong spot. I blame by smartphone. Sorry, all.
Isn't this a common practice in construction industry where one records Billing-in-excess-of-costs and costs-in-excess-of-billing?
I have been told in the past to issue a "Sales Order" and not a invoice for all the bad reasons noted above. Would that be correct as we have many of the same requests.
I have a client in a similar situation. Not because their customers request it, but because their people need to enter the order but not have inventory be reduced or revenue recognized.
The client uses
(1) A sales order (non-posting) is created at the time of order
(2) If, at the time of order, the customer pays up front, the Customer Payments screen is also used to CR A/R and DR Cash/Undeposited Funds/etc.
(3) When the goods are loaded onto the truck, the sales orders are converted into invoices, thereby reducing inventory, increasing A/R and sales, and recognising COGS.
(4) If there is an upfront payment on the account, it is applied to the invoice automatically.
At the end of a reporting period, if we need to make an entry to reclassify any A/R credits to Unearned Income and reverse it a day later, so be it.
Since this is a vibrant discussion I'll chime in on something Len mentioned "loan covenants." It's not accounting methods specifically, but germane to this discussion.
Lenders in the described scenario call this "pre-billing" and a distinct no-no. When a lender uses receivables as collateral, the intent is in cases of default the lender can collect from the customer without the borrowing clients' participation. The goods and services have been delivered and accepted based on the invoice submitted and funded.
In one case the client will mention that they are doing pre-billing and that account would be left out of the borrowing base, thus lowering the funds availability. In another case, the client fails to mention they are pre-billing and the lender figures it out and the client risks their financing arrangement completely.
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Gary,
Besides the potential for overt fraud, shouldn't the lender be aware of, and understand their client.
Just as many times in ABL, concentrations, over x days and foreign receivables are deducted from the borrowing base, the use of pre-bill can be done as well.
Is this not a question that the lender should be asking before or during the due diligence phase with the client?
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Wayne, concentration of account debtors and payment cycles are subjective matters related to context. Using a pre-billed invoice for collateral is a legal issue. The lender cannot collect on an invoice where the work has not been fully accepted.
Pre-billing can come up at any time during a funding relationship, not necessarily at the inception during a due diligence phase.
Gary,
While I understand this, legal vs business rule; a proper DD would discover whether the client does this as a general rule or they would be properly informed verbally (as well as within the contract) that it needs to be disclosed or withheld from collateral until service/delivery is executed.
So what if company ABC, a distribution center for a publicly traded company, pulls orders in early (up to 30 days) to ship for revenue so the end of the month/quarter look profitably better (when failing to realize that shipping the following months expected revenue early has now deficited that months expected goals because it's now gone ahead of schedule). How would this be deemed in the manner of ethics or legality when it's not necessarily requested by the customer to receive their goods or services a month early? The justification is to keep shareholders happy, seems to not concern what impact to customers it has based on their capacity to receive/store/pay for the early shipments.
How does this impact reportables on returns?
How does this really improve any margin when at the end of the year, total sales for the distribution center are going to be what they were regardless of shipping product a month early?
I realize this is not in effect pre-billing the customer, but it has caused billing without services rendered (no proof delivery ever shipped due to errors in rushing orders, trying to keep metric numbers up for shipping on planned dates, etc.)
Shipments being pushed out any carrier possible when customers have specific routing processes which need followed. This in turn causes fines to the supplying DC for not following contracts or obligations.
Customers who are identified as not to ship early having orders shipped prior to expected delivery date, again foregoing the proper routing/shipping practices.
Is it acceptable to forgo shipping to certain customer groups over another, even if the customer group not being shipped-to have delivery date expectations in advance of the groups chosen to be shipped early? Example: Companies A, B, and C are all customer group 1, they don't have the bigger contracts or shipments so their orders are deliberately pushed passed due so materials can be used to ship towards customers D, E, and F who are larger nation-wide higher volume customers.
I see it as an ethical question. Do your professional ethics permit you to represent that you have delivered goods or services when you have not? The proforma invoice resolves the question for the vendor or provider if you accept the premise that the customer's treatment of the transaction is their problem.
I am sensitive to this issue due to frequent instances of vendors that bill for an entire order before shipping the goods. I view this as an unethical business practice that has the undesirable side effect of creating extra work and confusion for my Accounts Payable team. The bottom line is that I will not pay such an invoice until all goods are received. I am thankful for the adoption of modified accrual in our governmental accounting system that generally relieves us of the obligation to accrue at month end.
I go back to my original point, maybe stated differently:
1. In the NORMAL course of business, when would you create an invoice?
2. How does that differ from what the customer is requesting now?
3. Why really does the customer want a different process?
Another option might be under the Bill and Hold arrangement. Your customer must have a valid purchase order which you acknowledged, you have the inventory to ship prior to period end but your customer wants you to delay shipment until the following accounting period. They must have a legitimate business reason for that and document the request via this Bill and Hold agreement. What this means is that your customer has purchase the product, title has transferred to them but the actual physical goods are stored in your warehouse until you release them to your customer.
These goods cannot be sold or shipped to any other customer as they are no longer in your inventory. The rest of this is similar to any revenue recognition test, including there are no remaining obligations that you (the seller) must complete and the payment from your customer is likely to happen. Under these circumstances you can book the revenue prior to shipping and the customer will book a liability to you and an entry to assets (inventory at seller’s location, etc.).
I guess, proforma invoice can be a viable option stating a probable shipment date. There are business rules v/s legal rules question here. And proforma invoice is also a legally valid option.
But as mentioned by Lee, in one of the replies, an expert comment from and Auditor would carry some more weight.
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