Deferred revenue, also known as unearned revenue, represents money received by a company for goods or services that have yet to be delivered or performed. It is initially recorded as a liability because it is an obligation to deliver goods or services in the future.
Initial Receipt of Deferred Revenue
When cash is received in advance for future revenue:
- Debit Cash/Bank
- Credit Deferred Revenue (Liability)
Example:
Date Particulars Debit (₹) Credit (₹) ------------------------------------------------------------------------ 2024-06-01 Cash A/c 20,000 To Deferred Revenue A/c 20,000 (Being advance payment received for future services)
Recognition of Revenue
When the revenue is earned (i.e., goods are delivered or services are performed):
- Debit Deferred Revenue
- Credit Revenue
Example:
Date Particulars Debit (₹) Credit (₹) ------------------------------------------------------------------------ 2024-07-01 Deferred Revenue A/c 20,000 To Service Revenue A/c 20,000 (Being recognition of revenue earned from advance payment)
By following these steps, the company ensures that revenue is recognized in the correct accounting period, in accordance with the accrual accounting principle. This provides a more accurate picture of the company’s financial performance and obligations.
