Businesses often receive money before delivering a product or service. When this happens, the company does not count it as earned income right away. Instead, it records it as a liability. This is because the company still owes the customer something. The accounting term for this is deferred revenue, and the journal entry to record this is called a Deferred Revenue Journal Entry. The deferred revenue journal entry helps keep the books accurate. It follows the matching principle of accounting, where income is recognized only when earned. This rule ensures that the business does not record profit before delivering the service or product. So, when a business gets paid in advance, it records the amount as unearned revenue under current liabilities.
For example, if a company gets ₹10,000 in advance for a 3-month service, it cannot record it as income right away. It first records it as deferred revenue. As the company performs the service each month, it gradually moves that amount to earned revenue.
What is Deferred Revenue?
Deferred revenue is money a company receives before it provides the goods or services. This is not actual revenue yet because the business still has to fulfill its promise. Until then, it stays as a liability on the balance sheet.
You may also hear people call it unearned revenue, advance income, or prepaid income. All these terms mean the same thing. This type of transaction is common in many industries like:
- Subscription services (magazines, newspapers)
- SaaS businesses (monthly or yearly software payments)
- Insurance companies (premiums paid in advance)
- Education services (tuition fees received before the course begins)
- Airline tickets booked in advance
When the company provides the service or delivers the product, it changes the deferred revenue into earned revenue by making another journal entry.So, deferred revenue starts as a liability. As the company delivers on its promise, it becomes part of actual revenue.
Why is Deferred Revenue Important in Accounting?
Deferred revenue plays an important role in accurate financial reporting. It helps businesses follow the accrual basis of accounting. Under this method, you must record revenue only when earned, not when received.
Let’s say a business collects ₹1,20,000 in January for a year-long subscription. If it records the full amount as revenue in January, it shows too much income for that month and too little for the rest of the year. This will mislead stakeholders and investors. To avoid this, the company uses a deferred revenue journal entry.
Here’s how it helps:
- Follow accounting standards – Companies must follow accounting standards like IFRS and GAAP. These rules require matching revenue with the time it is earned.
- Gives a clear financial picture – Deferred revenue shows the company’s responsibility to deliver a service. It keeps the balance sheet honest.
- Improves financial analysis – It helps analysts and investors see how much income is earned versus how much is still pending.
- Avoids overstatement of profit – Without deferred revenue, profit will look higher than it really is.
That is why every accounting system includes this type of journal entry, especially for service-based companies.
Deferred Revenue Journal Entry
When a company receives money in advance, it must make a deferred revenue journal entry to record it properly.
There are two types of entries:
1. When Payment is Received in Advance
When revenue is received in advance , a journal entry debiting the bank A/c and crediting the deferred revenue A/c is passed.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| xx-xx-xxxx | Bank A/c Dr. To Deferred Revenue A/c(Being amount received in advance for services) | 10,000 | 10,000 |
2. When the Service is Rendered
When the service for which advance money was received is rendered, the proportion of earned revenue out of total advance is recognised through this journal entry.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| xx-xx-xxxx | Deferred Revenue A/c Dr. To Revenue A/c(Being revenue recognized as service rendered) | 5,000 | 5,000 |
This process continues until all deferred revenue turns into earned revenue.
Relevance to ACCA Syllabus
The Deferred Revenue Journal Entry is a key concept in the Financial Accounting (FA) and Financial Reporting (FR) papers of ACCA. Students must understand how to record liabilities correctly under the accrual basis of accounting and apply IFRS 15 (Revenue from Contracts with Customers). It is also useful when analyzing working capital, contract-based revenue, and compliance reporting.
Deferred Revenue Journal Entry ACCA Questions
Q1: What is the correct journal entry when a company receives advance payment for services?
A) Revenue A/c Dr. To Bank A/c
B) Bank A/c Dr. To Deferred Revenue A/c
C) Deferred Revenue A/c Dr. To Bank A/c
D) Bank A/c Dr. To Revenue A/c
Ans: B) Bank A/c Dr. To Deferred Revenue A/c
Q2: Which financial statement will show deferred revenue?
A) Income Statement
B) Statement of Changes in Equity
C) Balance Sheet
D) Cash Flow Statement
Ans: C) Balance Sheet
Q3: Under which IFRS standard is deferred revenue recognized and treated?
A) IFRS 9
B) IFRS 15
C) IFRS 16
D) IFRS 10
Ans: B) IFRS 15
Q4: How does deferred revenue affect accounting when service is delivered?
A) Asset increases
B) Liability increases
C) Expense increases
D) Liability decreases and revenue increases
Ans: D) Liability decreases and revenue increases
Q5: What type of account is Deferred Revenue?
A) Current Asset
B) Current Liability
C) Equity
D) Non-Operating Income
Ans: B) Current Liability
Relevance to US CMA Syllabus
The US CMA (Certified Management Accountant) syllabus covers deferred revenue under Part 1: Financial Reporting, where students must understand revenue recognition and how deferred income affects liquidity and financial analysis. This concept is also essential in preparing financial statements and understanding performance obligations.
Deferred Revenue Journal Entry US CMA Questions
Q1: Why do companies record deferred revenue as a liability?
A) They receive payment after the service
B) They earn revenue immediately
C) They owe the service to the customer
D) It is treated as owner’s equity
Ans: C) They owe the service to the customer
Q2: What is the journal entry when revenue is earned from deferred income?
A) Bank A/c Dr. To Deferred Revenue A/c
B) Deferred Revenue A/c Dr. To Revenue A/c
C) Revenue A/c Dr. To Deferred Revenue A/c
D) Revenue A/c Dr. To Bank A/c
Ans: B) Deferred Revenue A/c Dr. To Revenue A/c
Q3: In management accounting, deferred revenue most directly impacts:
A) Cost structure
B) Operating expenses
C) Working capital
D) Marketing costs
Ans: C) Working capital
Q4: Which is an example of deferred revenue?
A) Interest income earned
B) Rent received in advance
C) Expense paid late
D) Bonus paid to employees
Ans: B) Rent received in advance
Relevance to US CPA Syllabus
In the US CPA FAR (Financial Accounting and Reporting) exam, deferred revenue is essential in revenue recognition, liability classification, and accrual accounting. Students must understand how to apply GAAP rules when recording income received before obligations are fulfilled.
Deferred Revenue Journal Entry US CPA Questions
Q1: Under US GAAP, when is deferred revenue recognized as income?
A) When cash is received
B) When legal agreement is signed
C) When performance obligation is met
D) When invoice is sent
Ans: C) When performance obligation is met
Q2: What happens to the balance sheet when a company earns deferred revenue?
A) Asset increases
B) Liability decreases
C) Liability increases
D) Equity decreases
Ans: B) Liability decreases
Q3: Which of the following is not classified as deferred revenue?
A) Customer advance
B) Prepaid subscription
C) Payment for future training
D) Accrued interest income
Ans: D) Accrued interest income
Q4: In double-entry accounting, deferred revenue entry involves:
A) Expense and cash
B) Asset and capital
C) Cash and liability
D) Cash and expense
Ans: C) Cash and liability
Q5: What is the effect of deferred revenue on the income statement at the time of receipt?
A) Increases income
B) Reduces expenses
C) No effect
D) Reduces liability
Ans: C) No effect
Relevance to CFA Syllabus
In the CFA Level 1 exam, deferred revenue is covered under Financial Reporting and Analysis, particularly in understanding liabilities, income recognition timing, and analyzing quality of earnings. Knowing the nature of deferred revenue helps candidates evaluate a company’s revenue sustainability and obligations.
Deferred Revenue Journal Entry CFA Questions
Q1: Deferred revenue is classified in the financial statements as:
A) Long-term debt
B) Retained earnings
C) Current liability
D) Prepaid expense
Ans: C) Current liability
Q2: Which financial metric does deferred revenue impact the most?
A) Net margin
B) Return on assets
C) Current ratio
D) Net profit
Ans: C) Current ratio
Q3: How does deferred revenue affect earnings quality?
A) Improves short-term income
B) Distorts actual performance if misused
C) Reduces working capital
D) Increases depreciation
Ans: B) Distorts actual performance if misused
Q4: In accrual accounting, when should revenue be recognized?
A) When order is confirmed
B) When cash is received
C) When obligation is fulfilled
D) When invoice is prepared
Ans: C) When obligation is fulfilled
Q5: What does a growing deferred revenue balance suggest?
A) Declining business
B) Increasing obligations
C) Decreasing liabilities
D) Higher net income
Ans: B) Increasing obligations
