Understanding liability vs revenue
When you sell a gift voucher or issue a customer credit, you are creating a liability or obligation to that customer to the value of the money received.
What is a liability?
A liability is a promise or obligation to your customer. It usually indicates that you have received money from a customer on the understanding that you will reimburse them, or deliver a service or product, at a later date. A liability is reported on a company's balance sheet, as opposed to on your Profit & Loss statement.
A good analogy for business liability is to think of a bucket:
Every time a voucher is purchased, or customer credit is issued, a cup of water is put into the bucket. This increases your liability amount.
Whenever a voucher or customer credit is redeemed, a cup of 'water' is then removed from the bucket, reducing your liability.
Liability vs Revenue in Timely
When viewing an invoice, you will see a new column for ' Account' which indicates whether or now the invoice item is a Liability or Revenue.
When you sell a voucher or issue the customer credit, this will be shown as a Liability on the account:
What does this mean for my Sales reports?
As the goods/service haven't been delivered to the customer, we don't recognise this transaction as a sale (yet). This means that any gift vouchers or customer credit issued will not be included in your sales reports/figures.
However, we have added a Gift Voucher section to the Sales report, which indicates the value of any gift vouchers issued and redeemed during that period.
Redeeming vouchers or customer credit
When you redeem a gift voucher or customer credit against an invoice, two things happen:
- Your liability balance is reduced.
- You record the sale of the services and/or products to the customer.
The liability reduction is reflected on the invoice by a negative value as below:
In this scenario, the service, product or package on the invoice will be treated as the revenue. This is what will be accounted for in your Sales reports. This means the sale isn't accounted for until the service has been delivered.
How can I work out how much liability I have outstanding?
For Gift vouchers:
Head over to the Customer gift voucher details report and run it for the desired time period. The 'Outstanding' column shows the total value of those gift vouchers, which is the liability for that period:
For Customer credit:
Head over to the Customer credit details report and run it for the desired time period. The 'Outstanding' column shows the total value of any outstanding credit, which is the liability for that period.
Accounting for liabilities with integrations
If you are using one of our accounting integrations, check out our guides for more information on working with liabilities: