How to Correctly Prepare Deferred Revenue Journal Entries

What are deferred revenue journal entries?

Any time your company receives payment for future goods or services, this is deferred revenue. You might also know it as unearned revenue. The deferred revenue journal entry is your tracking mechanism for this type of revenue, within your accounting.

If you are using accrual-based accounting, revenue is only recognized when it is earned. This means that deferred revenue is a liability account showing your obligation to your customer. When your company delivers the goods or services, the journal entry becomes real revenue.

Deferred revenue is part of the overall revenue recognition principle within the accrual method of accounting. It goes along with other methods of recording revenue as it is recognized, such as deposits, prepayments, and retainers. Some other examples of deferred revenue that your business might encounter include subscription-based services and memberships.

Deferred revenue is common for service businesses, but there are sometimes situations in which goods require deferred revenue, such as deposits for large orders.

What are deferred revenue journal entries in bookkeeping?

Given that a journal entry in accounting works to record business transactions, a deferred revenue journal entry is a recording of revenue not yet earned. 

Is deferred revenue a credit or a debit?

Recording deferred revenue means creating a debit to your assets and credit to your liabilities. As deferred revenue is recognized, it debits the deferred revenue account and credits your income statement.

Is deferred revenue an asset or a liability?

Because deferred revenue indicates goods or services you owe to your customers, it is a liability. It’s important to know that if the good or service is not delivered, even if it was planned, your company may owe the money back. Recording deferred revenue as a liability, instead of an asset, recognizes that there is always a risk that the product or service is not delivered.

If that does happen, your business needs to compensate the customer in most cases, which is why you should not count that revenue as an asset until it is realized. 

How is deferred revenue recorded?

Is deferred revenue on a cash flow statement?

Deferred revenue can be recorded on the cash flow statement, noted as deferred revenue. Even if you have not earned it yet, it is still money that can be spent. Of course, you will want to be sure that you can fulfill your obligations to your customer.

Where does deferred revenue go on the balance sheet?

Deferred revenue is listed as a liability on the balance sheet. When it is recognized (because your company has delivered), it is proportionally recorded as revenue on your income statement. 

How to log deferred revenue journal entries

How to create a deferred revenue journal entry

Under accrual accounting, financial transactions are recorded as and when hey occur. This means that when you create a deferred revenue journal entry, you only log revenue for what has been delivered.

If, for example, a customer pays $1000 in advance for two months of service, and you’ve only delivered one month, only $500 would be recorded as revenue. The credit/debit aspects of this are outlined above.

Examples of deferred revenue journal entries

A simple example of a deferred revenue journal entry could look like this. We will use the example of a $1200 subscription spread out across one year.

Date Account Notes Debit Credit
1/11
Cash
Payment for subscription
$1200
Deffered Revenue
$1200

On a monthly basis, the recordings would look like this.

Date Account Notes Debit Credit
1/11
Deffered Revenue
One month of subscription
$100
Revenue
$100

How to enter deferred revenue in Quickbooks

In Quickbooks, record deferred revenue under the ‘other current liability’ option. Set up products and services, and edit income account to deferred revenue. As you deliver, move items from deferred revenue and credit them as income under the appropriate account.

Can you debit AR and credit deferred revenue?

Accounts receivable, or AR, represents income from products and services delivered but for which payment has not been received. In other words, AR is credited when revenue is earned but not received, and as money is realized AR is debited and cash balance credited. While deferred revenue is classified as a liability, accounts receivable is an asset on the balance sheet until payment is actually received.

Other frequently asked questions about deferred revenue journal entries

How is deferred revenue treated for tax purposes?

The accrual method of accounting is acceptable to the Internal Revenue Service. Taxpayers can deer recognition until the time when advance payments are reported as revenue in the applicable financial statement.

Deferred revenue allows businesses to reflect their revenues as they occur, so accounting is more accurate, and revenue is better matched to expenses. This can also help reduce taxes, by reducing net income. Generally accepted accounting principles call for accurately calculating and reflecting revenue, expenses, and other information so that financial statements are of the highest quality possible.

What if deferred revenue is negative?

Negative deferred revenue on a balance sheet is usually a sign that something is off in your calculations, or your classifications. That would imply that the company has paid the customer, which means that the amount would be a receivable, as a negative liability is an asset.

How to get help with deferred revenue journal entries

Managing accrual based accounting and deferred revenue can get complicated, whether your business is small or dealing with a large volume of transactions. Finvisor will help you with any aspect of accounting, from monthly bookkeeping to complex oversight. As your on-demand CFO, we work to understand your unique challenges and qualities, and create solutions that work.

To learn more about what we do, or to request a quote, contact us at hello@finvisor.com or 415-416-6682. We’re here to help you navigate deferred revenue journal entries so you can make the most of your assets!

*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*

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