A deferred revenue journal entry is needed when a business supplies its services to a customer and the services are invoiced in advance.
For example, suppose a business provides web design services and invoices for annual maintenance of 12,000 in advance. At the time of invoicing the service has not been provided and the service revenue has not been earned, it therefore needs to be credited to the deferred revenue account.
Deferred revenue is sometimes referred to as unearned revenue.
The deferred revenue journal entry will be as follows.
Deferred Revenue Journal Entry
The accounting records will show the following bookkeeping entries for the web design maintenance services invoiced in advance:
|Deferred revenue account||12,000|
Deferred Revenue Journal Entry Bookkeeping Explained
The customer owes the business the money for the services until they are paid for. The business now has an asset (trade accounts receivable or trade debtor) for the amount due.
The service has not yet been provided to the customer and the service revenue is not treated as recognized revenue, it is credited to the balance sheet deferred revenue account until earned.
Accounting Equation for Deferred Revenue Journal Entry
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
In this case one asset (accounts receivable) increases representing money owed by the customer, this increase is balanced by the increase in liabilities (deferred revenue account). The credit to the deferred revenue account represents a liability as the service still needs to be provided to the customer.
Deferred Revenue Recognition
Deferred revenue recognition will happen as soon as the service is provided.
In the above example, the maintenance contract costs 12,000 for 1 year, assuming the business produces monthly management accounts, each month 1,000 will be become recognized revenue and credited to the services revenue account in the income statement with the following journal entry
|Deferred revenue account||1,000|
|Service revenue account||1,000|
At the end of 12 months all the deferred revenue (unearned revenue) will have been taken to the service revenue account (earned revenue).
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.