Deferred Revenue Journal Entry
Overview
Deferred revenue is the payment the company received for the goods or services that it has yet to deliver or perform. It is the revenue that the company has not earned yet. Likewise, the company needs to properly make the journal entry for this type of advance payment as deferred revenue, not revenue.
Under the accrual basis of accounting, revenue should only be recognized when it is earned, regardless of when the payment is received. That is why the advance payment of the goods or services that the company received should be recorded as deferred revenue instead of revenue.
Deferred revenue is a liability account that represents the obligation that the company owes to its customer when it receives the money in advance. Likewise, after the company delivers goods or performs services, it can make the journal entry to transfer the deferred revenue to revenue.
Deferred revenue journal entry
The company can make the deferred revenue journal entry by debiting the cash account and crediting the deferred revenue account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Deferred revenue | 000 |
Deferred revenue is a liability account which its normal balance is on the credit side. This account shows that the company received the payment from the customer for the goods or services that it has not delivered or performed yet.
After the company delivers goods or performs the services, it can make the journal entry to eliminate deferred revenue by debiting deferred revenue account and crediting revenue account.
| Account | Debit | Credit |
|---|---|---|
| Deferred revenue | 000 | |
| Revenue | 000 |
This journal entry is to eliminate the liability after the company has fulfilled its obligation. At the same, it is also made to recognize the revenue that the company earns after it has delivered goods or performed the services during the period.
Example
For example, on September 28, 2020, the company ABC Ltd. received the $3,000 cash pre-payment for the six-month bookkeeping service from its client. The bookkeeping service will start from October 2020 to March 2021.
In this case, the company needs to account for the $3,000 cash received as the deferred revenue as it has not performed service for the client yet.
Hence, on September 28, 2020, the company needs to make the journal entry for deferred revenue as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 3,000 | |
| Deferred service revenue | 3,000 |
This journal entry is made to recognize the $3,000 as a liability since the company has a performance obligation to transfer the bookkeeping service to its client as it already received the money.
Both cash and deferred revenue are balance sheet items. Likewise, this journal entry does not affect the income statement at all. What it does is simply increasing both assets and liabilities by $3,000.
Next month, when the company has performed one month of the bookkeeping service, it can record $500 ($3,000/6) as revenue.
In this case, in the October 31 adjusting entry, the company can make the journal entry to transfer one month of its deferred revenue to revenue as below:
| Account | Debit | Credit |
|---|---|---|
| Deferred service revenue | 500 | |
| Service revenue | 500 |
In this journal entry, the company recognizes $500 of revenue for the bookkeeping service the company has performed in October 2020. Likewise, the remaining balance of deferred revenue for the bookkeeping service here will be $2,500 (3,000 – 500).