Preventive maintenance contracts and service agreements are contracts with a customer to perform routine maintenance and service on pieces of equipment. HVAC and other specialty contractors regularly utilize preventive maintenance and service agreement to provide a steady flow of income. Accounting tips are provided below, specifically for Quickbooks users.
If you receive a prepayment for services that have not been performed, this is considered deferred revenue. According to proper accounting techniques, Deferred revenue is actually a liability until the service has been performed. If your business does not receive payment for preventive maintenance or service agreements until the service is performed, then you do not have a liability, and do not need to consider this information. Normal accounting would be, to bill when the service is performed. For those of you receiving pre-payment from customers, read on.
There are several steps involved when you have deferred revenue. For example:
Scenario: Let's assume you have a preventive maintenance contract with customer (Alan Smith) to service equipment twice a year. The customer (Alan Smith) has pre-paid for this service an amount of $200. This covers all PM services performed for the entire year.
You will be using several accounts in recording this transaction. These include:
You probably already have most of these accounts set up in Quickbooks, except for the deferred revenue account. To setup this account, create a new account in Quickbooks of type - Other Current Liability. You can label this account Deferred Revenue, Preventive Maintenance Prepayments, Service Agreement Prepayments or whatever you like.
Your next step is to set up the appropriate items that will be used in Quickbooks. The first item that needs to be setup we will call PM Annual. This item will be used to record the initial transaction. To setup this item in Quickbooks, use the example below:
We called this item PM Annual with an amount of $200.00. Notice that the account is the deferred revenue account. In this case, I labeled my deferred revenue account Preventive Maintenance Prepay.
Next, we will create an invoice for Alan Smith. The item we will use on the invoice is PM Annual. See the example below.
Then we will go to the receive payments section of Quickbooks and record Alan Smith's payment of $200.00. After this transaction, the customer will have a balance of -0-, the cash or bank account increased by $200.00, and the deferred revenue liability account shows a $200.00 credit. Notice that no transactions, thus far, have impacted our income statement. However, if we look at our balance sheet, we now have an other current liability of $200.00. See the example below.
At this point we are finished with accounting for the initial transaction. The next step will happen when we perform the first or our two trips to Alan Smith as part of our service agreement.
When we perform the first service call as part of the preventive maintenance contract, we need to recognize half of the deferred revenue as income. In this case, we will need two new Quickbooks items, and one group item. We will call these individual items PM Spring 1 and PM Spring 2. Then we will set up a group item. It will be set up as follows:
Notice that the rate for PM Spring 1 is $100.00 and the account is PM Revenue. Also, the rate for PM Spring 2 is -$100.00 (negative) and the account is the deferred revenue account which we named Preventive Maintenance Prepay. Our next step is to set up the group item. We will call this group item PM Group, and it is set up as follows:
Notice the group item includes both PM Spring 1 and PM Spring 2. Be sure to put the description you would like for your customer to see on the group item. Now, when we go out to perform the first of our two service calls for Alan Smith, we will create an invoice with the PM Group item as follows:
Notice that the two amounts cancel each other out. This is because the customer has already paid, and the invoice should be -0-. We use the group item so that we can see what is going on on the screen. However, what the customer will see is as follows:
Now, all of the accounting has been taken care of. The customer still has a balance of -0-. The revenue is recognized on our income statement, and the deferred revenue account which we labeled Preventive Maintenance Prepayments now only reflects $100.00. This is because we still have one more service call to fulfill our preventive maintenance contract. Below are some snapshots of our income statement and balance sheet.
Now you have properly accounted for the deferred revenue on a prepaid preventive maintenance or service agreement contract.
For those of you using Dispatched, you can use the group item above on the service agreement for Alan Smith by clicking the Add Parts button. Then choose the Group Item (PM Group). The work order that gets created will then display the description for the group item. When you send the work order into Quickbooks, all of the above transactions will be automatic. Now you have a record in Dispatched, and in Quickbooks, of when you performed your service agreement.
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