Accounting for Deferred Revenue (Unearned Revenue)

Deferred revenue, also known as unearned revenue, refers to payments received from customers for goods or services not yet delivered or performed. It is a liability on the balance sheet until the company fulfills its contractual obligations. Common examples include subscription fees, advance ticket sales, maintenance contracts, and prepaid services.

Recognition and Initial Measurement

Deferred revenue is recognized when cash or other consideration is received before the underlying goods or services are transferred to the customer. The company records a liability, reflecting its obligation to deliver products or services in the future.

Journal Entry at Receipt:

 Dr. Cash

  Cr. Deferred Revenue (Unearned Revenue)

This entry increases both cash and liabilities, with no immediate impact on earnings.

Revenue Recognition: Satisfying Performance Obligations

As the company fulfills its performance obligations—by delivering goods, providing services, or meeting contract milestones—it recognizes revenue and reduces the deferred revenue liability.

Journal Entry as Revenue is Earned:

 Dr. Deferred Revenue

  Cr. Revenue (Sales, Service Revenue, etc.)

This aligns with the principles in ASC 606 (US GAAP) and IFRS 15 (IFRS), which require revenue to be recognized when control of the goods or services passes to the customer.

Examples of Deferred Revenue in Practice

• Magazine subscriptions: Payment received in advance is initially recorded as deferred revenue. As each issue is delivered, a portion of revenue is recognized.

• Annual software maintenance contracts: Upfront payment is recognized as deferred revenue and earned on a straight-line basis as support is provided.

• Gift cards: Amounts received are deferred until redemption or expiration.

Disclosure Requirements

Financial statements must clearly disclose:

• The nature and amounts of deferred revenue balances

• Significant judgments regarding performance obligations and revenue recognition timing

• Contract balances and changes during the period, if material

These disclosures allow users to evaluate future revenue streams and obligations.

Balance Sheet Presentation

Deferred revenue is classified as a current liability if expected to be earned within one year, and as a noncurrent liability if the performance obligation extends beyond one year.

Adjustments and Refunds

If a company is unable to deliver goods or services and must refund the customer, the deferred revenue liability is reduced and cash is paid back.

Journal Entry for Refund:

 Dr. Deferred Revenue

  Cr. Cash

Relevant Accounting Standards

• US GAAP: ASC 606 – Revenue from Contracts with Customers

• IFRS: IFRS 15 – Revenue from Contracts with Customers

Both standards require deferred revenue to be recognized as a liability until the performance obligation is satisfied.

Summary Table: Deferred Revenue Accounting

Stage	Journal Entry	Financial Statement Impact
Cash received in advance	Dr. Cash / Cr. Deferred Revenue	Increases assets and liabilities
Revenue earned	Dr. Deferred Revenue / Cr. Revenue	Decreases liability, increases income
Refund to customer	Dr. Deferred Revenue / Cr. Cash	Decreases liability and assets

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