What is deferred revenue?
Tuesday, May 3, 2011 at 4:29PM Deferred Revenue Overview
Deferred revenue is a payment from a customer for either services that have not yet been performed or goods that have not yet been shipped by the recipient. You should record deferred revenue as a liability, which means that the initial journal entry to record it is a debit to the Cash account and a credit to the Deferred Revenue account.
As the recipient earns revenue over time, it reduces the balance in the Deferred Revenue account (with a debit) and increases the balance in the Revenue account (with a credit). The Deferred Revenue account is normally classified as a current liability on the balance sheet.
Deferred Revenue Example
For example, Alpha Corporation hires Northern Plowing to plow its parking lot, and pays $5,000 in advance, so that Northern will give the company first plowing priority throughout the winter months. At the time of payment, Northern has not yet earned the revenue, so it records all $5,000 in a Deferred Revenue account, using this entry:
| Debit | Credit | |
| Cash | 5,000 | |
| Deferred revenue (liability) | 5,000 |
Northern expects to be plowing for Alpha for a period of five months, so it elects to recognize $1,000 of the deferred revenue per month in each of the five months. For example, in the first of the five months, Northern records the following entry:
| Debit | Credit | |
| Deferred revenue (liability) | 1,000 | |
| Plowing revenue (revenue) | 1,000 |
Similar Terms
Deferred revenue is also known as prepaid revenue or unearned revenue.
Similar Topics
Revenue Recognition Criteria
What is Unrecorded Revenue?
When Can I Recognize Revenue?
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