Recording a deferred revenue indicates that the entity has already received payment in return for goods and services that they have yet to deliver, which is listed as an obligation on a balance sheet as the product/service is due to the customer. The treatment, which corrects the timing of revenue recognition with service provision, is a perfect accounting practice. An advance paid subscription to a magazine is an example of deferred revenue: The magazine has the cash but still owes a part of the subscription.
Core to a journal entry of deferred revenue, the recognition of deferred revenue and classification as current or noncurrent — principles of proper accounting for a business. The knowledge of deferred, accrued, and unearned revenue is significant for accurate financial reporting. Deferred revenue GAAP and deferred revenue IFRS give guidelines for these types of transactions.
Accounting for Deferred Revenue
This is known as deferred revenue in accounting, a key move in which the cash is paid in the present while services are to be performed in the future. This will often be recorded as a liability by the company that needs to provide the goods or service to recognize the revenue, allowing for compliant reporting in light of standards like deferred revenue GAAP and IFRS.
What is Deferred Revenue?
A company recognizes revenue once the delivery of its goods or services has been delivered. Imagine a company is paid before sending the goods or services. In that scenario, it cannot acknowledge that revenue right away, but instead will show that amount as deferred revenue, which means its financial statements will accurately capture its real economic situation.
For example, a company that sells annual software licenses may collect payment upfront but delivers the service over a term. This will allows users to implement deferred revenue recognition processes to recognise revenue over a period of time.
Deferred Revenue Case Study
Deferred revenue is charged at the various levels in the following industrial sectors:
- Subscription firms — Netflix for example — get paid upfront for a service they provide over time.
- The software-as-a-Service (SaaS) business model charges for software updates and support overtime, However, the subscription fees are collected in advance with the payment being upfront.
- Insurance companies take contributions right away, but they deliver coverage bit by bit.
- When you buy airline tickets, you are required to pay before the passenger’s flight.
Deferred Revenue Journal Entry How to Record?
This entry correctly records the deferred revenue that complies with accounting principles. When any kind of company is paid in advance:
Deferred Revenue Journal Entry How to Record?
This entry correctly records the deferred revenue that complies with accounting principles. When any kind of company is paid in advance:
Initial entry:
| Account | Debit | Credit |
| Cash/Bank | ₹10,000 | |
| Deferred Revenue | ₹10,000 |
Revenue recognition when service is delivered:
| Account | Debit | Credit |
| Deferred Revenue | ₹5,000 | |
| Revenue | ₹5,000 |
This approach ensures revenue is only recognised when the service or product is delivered.
Deferred Revenue vs Unearned Revenue
There seems to be confusion about deferred and unearned revenue, but both terms talk about the same thing: the cash collection before delivering goods and services. Nonetheless, different areas have their unique preference.
In accounting, these two adjectives mean the same. Some companies prefer unearned revenue, and others say deferred revenue, but they both refer to liabilities. When the revenues are recognised, these payments are only removed from the balance sheet as liabilities. The Differences between deferred revenue and unearned revenue in different industries are:-
- Service Companies: Consulting and marketing firms view unearned revenue as advance payments for work to be done in the future.
- Subscription Companies: SaaS and magazine businesses typically say deferred revenue because they recognise revenue over time.
Why is Deferred Revenue Recognized as a Liability?
The organisation cannot immediately recognise the income since it owes a product or service to the customer. Simply put, if the company does not deliver for whatever reason, it must return the money, hence its liability classification.
Deferred Revenue vs Accrued Revenue
The major contrasting factor between deferred revenue and accrued revenue is timing. Deferred revenue applies when cash is received before providing a service, whereas accrued revenue applies when a service is supplied before cash receipt. Key Differences Between Deferred and Accrued Revenue are:-
| Aspect | Deferred Revenue | Accrued Revenue |
| Cash Received | Before service | After service |
| Accounting Entry | Liability | Asset |
| Recognition Timing | After service | Before payment |
Deferred Revenue Example: A gym collects ₹12,000 for a 12-month membership. Each month, it recognises ₹1,000 as revenue.
Accrued Revenue Example: The consultant completes the project for the client but bills him later. The revenue is recorded even before the payment is received.
Deferred Revenue: Current or Noncurrent Liability?
Deferred revenues should be classified as current or noncurrent to be evidenced when the corresponding service has been provided.
- Current Deferred Revenue: The current liability of a company becomes deferred revenue when it expects to deliver the service within twelve months.
- Noncurrent Deferred Revenue: If that service exceeds a year, it becomes a noncurrent liability.
Examples of Current vs Noncurrent Deferred Revenue
| Type | Example | Classification |
| Annual Gym Membership | Paid for 12 months in advance | Current |
| Five-Year Software License | Paid upfront for five years | Noncurrent |
Relevance to ACCA Syllabus
Deferred revenue is a key feature of ACCA syllabus Financial Reporting (FR) and Strategic Business Reporting (SBR) exams. This means accounting for liabilities about unearned income and following with IFRS 15. For ACCA students, this also means understanding how deferred revenue affects financial statements and how it is treated correctly under international accounting standards.
Deferred Revenue ACCA Questions
Q1: Deferred revenue is recognised as which of the following under IFRS 15?
A) A non-current asset
B) A liability
C) A revenue
D) An expense
Ans: B) A liability
Q2: At what time is deferred revenue recognized at earned revenue in the financial statements?
A) When the cash is received
B) Upon delivery of the service or product
C) When the company is cash flow negative
D) When a contract is signed
Ans: B) On delivery of service or product
Q3: When deferred revenue is recorded, which of the following financial statements is impacted?
A) Income Statement only
B) Balance Sheet only
C) Both Income Statement and Balance Sheet
D) Statement of Cash Flow only
Ans: C) Income Statement and Balance Sheet
Q4: A company is paid in advance for a one-year subscription service. How is this treated in the financials?
A) Immediately recorded as revenue
B) A$5.2 million deferred and recognised as revenue over the subscription period
C) Included as a financial asset
D) Recorded as an expense
Ans: B) Ipause me and recognize as revenue over the subscription period
Q5: Which of the following is the most accurate description of deferred revenue?
A) A future obligation to provide goods or services
B) A future cash outflow to suppliers
C) A previous revenue recognition journal entry
D) A contingent liability
Ans: A) An obligation to provide goods or services in the future
Relevance to US CMA Syllabus
In the United States (Certified Management Accountant) CMA exam, the subject of deferred revenue is one of the most important topics in the Financial Reporting, Planning, Performance, and Control sections. CMA examinees need to know how deferred revenue impacts financial statements, cash flows and revenue recognition policies.
Deferred Revenue US CMA Questions
Question 1: In accrual accounting, how do you book deferred revenue for a company?
A) At the time of cash receipt as revenue
B) An expense until you earn it
C) Record it as a liability until the service or product is provided
D) As equity part of balance sheet
Ans: C) Until the service or product is delivered as liability
Q2: What effect does deferred revenue have on analysis of financial performance?
A) It immediately raises total revenue
B) It artificially boosts profit margins
C) It can produce misleading indicators of profitability in the short run
D) It has no effect on financial examination
Ans: C) It can produce misleading short-term measures of profitability
Q3: A business collects a prepayment for a service to be rendered in the coming financial year. What is the appropriate accounting treatment?
A. Treat it as income right away
B) It is recorded as deferred revenue, and reported under liabilities
C. Make an entry on accounts receivable (an asset)
D) Wait until the service is performed
Ans: B) Show it as deferred revenue as a liability
Q4: What are the accounts affected when company earns revenue that was booked as deferred revenue earlier?
A) Increases in revenue and decreases in liabilities
B) Assets rise, and liabilities fall
C) revenues go up and expenses goes down
Ans: A) Revenue increases and liabilities decrease
Q5: The following statement about deferred revenue is true?
A) It is recognized at the point of revenue realization
B) Future delivery of goods or services obligation
C) It allows for a cash influx without an element on the financial statements
D) No impact on liabilities
Ans: B) It is a requirement to deliver goods or services in the future
Relevance to US CPA Syllabus
Deferred revenue is one of the more heavily-tested topics in the US (Certified Public Accountant) CPA exam, particularly in Financial Accounting and Reporting (FAR). As CPA candidates, you need to understand what realisation means, as well as how deferred revenue is recorded and recognised and their effects on financial statements and audit procedures.
Deferred Revenue US CPA Questions
Q1: What tells you that you have to recognize deferred revenue?
A) Principle of Revenue Recognition
B) Matching Principle
C) Historical Cost Principle
D) Consistency Principle
Ans: A) Revenue Recognition Principle
Q2: A company sells an annual software license and collects full payment at the beginning of the year. How should it be recorded?
A) Is a revenue (already earned) as recognized immediately
B) Any amounts charged for the period of contract to date would be recorded as deferred revenue and recognised over the contract period
C) Reported as a gain in other comprehensive income
D) Treated as an asset
Ans: B) Defer revenue and recognize over the period of the contract
Q3: It may be difficult to understand how deferred revenue shows up in the statement of cash flows.
A) Cash inflow under operating activities
B) It is reported in the investing section
C)It does not impact cash flows.
D) It is subtracted from net income in operating activities
Ans: A) Cash inflow from operating activities
Q4: What is the consequence for an unclassified Deferral of Revenue?
A) The company can substantially inflate its profits
B) The company’s liabilities will go down
C) Company’s equity will be understated
D) The company’s assets will be overstated
Ans: A) The company could exaggerate its profit
Q5: How does the effect of recognizing earned deferred revenue affect the income statement?
A) Increases revenue and lowers liabilities
D) Increases liabilities and decreases expenses
C) Reduce revenue and increase liabilities
D) Do not affect the financial statements
Ans: A) Revenue and liability affected
Relevance to CFA Syllabus
With respect to financial reporting and analysis as per CFA (Chartered Financial Analyst) syllabus, deferred revenue comes into the picture. CFA candidates must be familiar with revenue recognition policies and consider their influence in terms of earnings quality, financial ratios and cash flow forecasts.
Deferred Revenue CFA Questions
Q1: Understand like deferred revenue gives a leverage to a company, if so why?
A) Liabilities increase and equity decrease
B) Reduces liabilities and increases equity
C) Boosts operating cash flow but has no impact on leverage
D) Does not affect the degree of financial leverage
Ans: A) Increase liabilities and decrease equity
Q2: But why is deferred revenue a liability?
A) A future obligation to provide goods or services
B) It is a non-cash obligation carried in the firm equity
C) It involves a probable loss contingency
D) It has no financial impact
Ans: A) It is a future commitment to provide goods or services
Q3: A company has a high deferred revenue balance. What does this indicate?
A) How well they will be able to recognize future revenue
B) Weak financial position
C) Drop in operating cash flow
D) Poor earnings quality
Ans: A) Robust future revenue recognition potential
Q4: How do you analyze the financial statement effects of deferred revenue?
A) Affects revenue trend and cash flow analysis
B) It Does Not Impact Financial Ratios
C) It is omitted from balance sheet analysis
D) It raises equity to shareholders
Ans: A) It impacts the revenue trends & cash flow analysis
Q5: What does a large deferred revenue balance mean for future profitability?
A) It increases future revenue reported
B) Decreases reported profits
C) Does not affect profitability
D) Decreases liabilities without impacting revenue
Ans: A) higher future reported revenue
