Deferred Revenue - Definition - Recognition And Accounting Journal Entry

Firstly, we must know about What is Deferred Revenue, then we can easily pass the Deferred Revenue Journal Entry.

Deferred Revenue Definition

Deferred is related to future period, so Deferred Revenue means that we received payment for the goods sold but still we do not delivered or rendered our services to customers. We will render our services or deliver goods to customers in future period of time. It is a Currant Liability under Deferred Liabilities for the Selling Company and Current Asset under Deferred Assets for the Customers with in the Current Accounting Period.

Example:

When the Company A receives the payment from the customer for goods Rs. 6000, then it is a Deferred Revenue or Unearned Revenue or Revenue Received in Advance for the Company and it is a Current Liability as well. From the point of view of Customer, It is a Current Asset because the benefits for the goods still not received by him / her.

Deferred Revenue Recognition

Deferred Revenue is recognized when the company actually earned the revenue. In other words, when the goods delivered or services rendered to customers. It is a Current Liability for the Company, so it is recorded in Balance Sheet Under the Head of Current Liabilities. With the passage of time, when the goods delivered or services rendered by the company, the deferred revenue decreases and actually revenues earned by company increases.

You may also be interested in Revenue Recognition Principle GAAP

Deferred Revenue Journal Entry

There are two cases for the recording of Deferred Revenue in the Accounting Journal of the company:

1. When we record the revenue as revenue and not liability

In this case, we initially record the revenue as revenue and then transfer only that portion to Current Liability for which we actually not delivered goods or services rendered to our customers. In Accounting, following Deferred Revenue Journal Entries are passed:

When the payment is received from the customers but neither the goods delivered not services rendered by the company to customers, then following Accounting Journal Entry is passed in the book of Company by considering our example above shown:

Cash a /c 6000

                           Revenue a/c 6000

At the end of Current Accounting Period, let suppose we delivered the half quantity of goods or render our services to customers but half of the quantity of goods or services still not delivered or rendered, then the following adjusting Entry is passed in the Journal / Book of Company

Revenue a/c 3000

                                               Unearned Revenue a/c 3000

The remaining amount goes to Balance Sheet for Unearned Revenue a/c for Rs. 3000 in Liabilities side under the Head of Current Liabilities and Revenue a/c is closed by Rs. 3000 and transferred to Profit And Loss Account or Income Statement by passing Closing Journal Entries in the Book of Company.

2. When we record the Revenue as a Current Liability

In this case, we record the revenue as Current Liability and following Accounting Journal Entry is passed:

Cash a/c 6000

                                          Unearned Revenue a/c 6000

At the end of Current Accounting Period, let say that the company actually earned the revenue by delivering the goods or rendering the services to customers of Rs. 3000, then following Journal Entry is Passed in the Book of Company:

Unearned Revenue a/c 3000

                                               Revenue a/c 3000

The balance amount of Unearned Revenue goes to Balance Sheet under the head of Current Liabilities and Revenues a/c is closed by passing Closing Journal Entries and transferred to Profit and loss account or Income Statement for Rs. 3000.

So, it is all about Deferred Revenue Definition, Recognition And Accounting Journal Entry.