How to Record Deferred Revenue

For recording the deferred revenue, you should know the meaning of deferred revenue. Deferred revenue is advance revenue which we receive from our customer before providing him the goods or services. Any earning in the form of advance will be our liability. So, we will treat deferred revenue as the record of liability.

Following are the Main Step of Recording Deferred Revenue

1. Use Accrual System of Accounting

In this system, we record the revenue when we have earned it through providing goods and services instead when we have received money from our customers. So, we have to fix the system of accounting. If we have to record deferred revenue, we must use accrual system of accounting. If we are using already cash basis of accounting system, we need not record deferred revenue. 

2. Learn Accrual System of Accounting

In second step, you should learn completely accrual system of accounting. As per this system, we record earning when we have earned otherwise it will be deferred. For example, we are providing coaching for one year. We have received advance of $ 10,000 from students for coaching fees. This is not our revenue. In income statement, if there is including the amount of $ 10,000, we need to deduct deferred or advance revenue because this is not our part of earning. In the end of year, we have taught our students, it will be our income and will add in our income statement.

3. Understand the Time Period of Preparing Financial Statement

Most of companies prepare financial statements at the end of the year. But it can be made at end of each month. So, we have to understand which list of transactions will include in the record of deferred revenue. Understand it with following simple example

1. For example : We are preparing financial statement at the end of year. We have received coaching fees $ 2000 of two months advance. So, we will identify on $ 1000 as deferred revenue.
2. For example : We are preparing financial statement at end of year at 31st march 2015. In jan. 2015, we have received coaching fees of $ 5000 for five year. In jan., feb and march, we have taught the students. Only april and may 2015, we have to teach. So, $ 2000 is our deferred revenue.

4. Record of Deferred Revenue in the Books of Accounts

In above example 2 of 3 step. , we have identify the $ 2000 as our deferred revenue. We will pass following journal entry.

Bank Account Debit $ 2000

Deferred Coaching Fees Revenue Credit  $ 2000

We will deduct deferred revenue from total revenue of coaching fees of $ 5000 in income statement. In balance sheet, we will show deferred coaching fees revenue as our current liability.

5. Record of Deferred Revenue When it will become Earned Revenue

In the end of May 2015, $ 2000 will become our earned revenue. So, we will transferred deferred revenue to earned revenue.

Deferred Coaching Fees Revenue Credit  $ 2000

Coaching Fees Revenue Credit  $ 2000

Now, in the end of 31st march 2016, we will add this earned income in the current income of 1st april 2015 to 31st march 2016 coaching fees in our income statement. Second, in balance sheet, we will deduct $ 2000 from total deferred revenue liabilities. 

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Accounting Education: How to Record Deferred Revenue
How to Record Deferred Revenue
Accounting Education
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