Deferred Income Accounting Entry

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:

DateAccount TitleDebit ($)Credit ($)
01-01-2024Bank A/c Debit12,000
01-01-2024To Deferred Income12,000

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.

DateAccount TitleDebit ($)Credit ($)
01-31-2024Deferred Income A/c Debit1,000
01-31-2024To Revenue1,000

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:

DateAccount TitleDebit ($)Credit ($)
03-01-2024Bank A/c Debit15,000
03-01-2024To Deferred Income15,000

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.

DateAccount TitleDebit ($)Credit ($)
06-15-2024Deferred Income A/c Debit15,000
06-15-2024To Revenue15,000

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:

DateAccount TitleDebit ($)Credit ($)
07-01-2024Bank A/c Debit24,000
07-01-2024To Deferred Income24,000

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.

DateAccount TitleDebit ($)Credit ($)
07-31-2024Deferred Income A/c Debit1,000
07-31-2024To Revenue1,000

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:

DateAccount TitleDebit ($)Credit ($)
09-01-2024Bank A/c Debit6,000
09-01-2024To Deferred Income6,000

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.

DateAccount TitleDebit ($)Credit ($)
09-30-2024Deferred Income A/c Debit500
09-30-2024To Revenue500

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.

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