Deferred revenue, also known as unearned revenue, refers to payments received by a business for goods or services that have not yet been delivered or rendered. Since revenue has not yet been received, it is recorded as a liability on the balance sheet until the related goods or services are provided.
Example 1: Deferred Income for Annual Subscription Service
Scenario: On January 1, 2024, your business receives $12,000 in advance for one year of subscription service to be provided over a next 12 months.
Initial Journal Entry:
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
01-01-2024 | Bank A/c Debit | 12,000 | |
01-01-2024 | To Deferred Income | 12,000 |
Explanation:
- Bank will debited to record the receipt of payment.
- Deferred Income will credited as a liability to reflect the obligation to provide services in the future.
Recognition of Revenue:
Each month, $1,000 of the deferred income will be recognized as revenue.
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
01-31-2024 | Deferred Income A/c Debit | 1,000 | |
01-31-2024 | To Revenue | 1,000 |
Explanation:
- Deferred Income will debited to reduce the liability as the service is provided.
- Revenue will credited to recognize the income earned for the month.
Example 2: Deferred Income for Event Sponsorship
Scenario: On March 1, 2024, your business receives $15,000 in advance from a sponsor for an event in June 2024.
Initial Journal Entry:
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
03-01-2024 | Bank A/c Debit | 15,000 | |
03-01-2024 | To Deferred Income | 15,000 |
Explanation:
- Bank will debited to reflect the receipt of the sponsorship payment.
- Deferred Income will credited as a liability because the event has not yet occurred.
Recognition of Revenue:
The deferred income is recognized as revenue when the event occurs in June 2024.
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
06-15-2024 | Deferred Income A/c Debit | 15,000 | |
06-15-2024 | To Revenue | 15,000 |
Explanation:
- Deferred Income will debited to reduce the liability.
- Revenue will credited to reflect the income earned from the event.
Example 3: Deferred Income for Prepaid Software License
Scenario: On July 1, 2024, your business receives $24,000 for a two-year software license agreement.
Initial Journal Entry:
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
07-01-2024 | Bank A/c Debit | 24,000 | |
07-01-2024 | To Deferred Income | 24,000 |
Explanation:
- The bank will debited to reflect the payment received.
- Deferred Income will credited as a liability since the software license is to be provided over two years.
Recognition of Revenue:
Each month, $1,000 of the deferred income will be recognized as revenue.
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
07-31-2024 | Deferred Income A/c Debit | 1,000 | |
07-31-2024 | To Revenue | 1,000 |
Explanation:
- Deferred Income will debited to decrease the liability.
- Revenue will credited to reflect the income earned for providing the software license for the month.
Example 4: Deferred Income for Maintenance Contract
Scenario: On September 1, 2024, your business receives $6,000 for a one-year maintenance contract, with services to be provided monthly.
Initial Journal Entry:
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
09-01-2024 | Bank A/c Debit | 6,000 | |
09-01-2024 | To Deferred Income | 6,000 |
Explanation:
- The bank will debited to record the advance payment.
- Deferred Income will credited as a liability, representing the obligation to provide maintenance services over the next 12 months.
Recognition of Revenue:
Each month, $500 of the deferred income will be recognized as revenue.
Date | Account Title | Debit ($) | Credit ($) |
---|---|---|---|
09-30-2024 | Deferred Income A/c Debit | 500 | |
09-30-2024 | To Revenue | 500 |
Explanation:
- Deferred Income will debited to reduce the liability as services are provided.
- Revenue will credited to recognize the income earned for the month.
These examples illustrate how deferred income is initially recorded as a liability and then gradually recognized as revenue as the goods or services are delivered.