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  1. This answer was edited.

    Before I answer this question of your's it would be beneficial for you to have clarity over the concept of Deferred Revenue. Meaning of a Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before renderingRead more

    Before I answer this question of your’s it would be beneficial for you to have clarity over the concept of Deferred Revenue.

    Meaning of a Deferred Revenue

    Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

    The concept of deferred revenue applies only if an entity follows the Accrual System of Accounting. If the entity follows the cash system of accounting it’s of no relevance as the entire amount received becomes income in the year of receipt.

    Whether the Deferred Revenue is a Liability?

    The answer to this question is  “Yes” it is a liability. Even though you got the answer that it is a liability but I believe a part of the question remains unanswered i.e why is it a liability?

    The logic for the same is- Since the entity has already received the amount even before rendering services or delivering goods the entity or a company has a sort of an obligation to deliver the goods or render such services at the predetermined future date. Failing which it may be liable to face legal proceedings or legal actions. Hence, it becomes a liability on a part of the entity to honour such a transaction.

    When the entity receives the amount before delivering goods or rendering services that amount is recorded as a “Liability” and once the goods are delivered or services are rendered the liability is reduced and the entity records it as a “Revenue”.

    For Example,

    In the case of an Educational Institutes like the Universities, Coaching Institutes etc. it charges fees even before the term commences. In such a case the entity has not yet rendered service of imparting education hence, the tuition fees so received shall become a deferred revenue and shall be recorded as a liability at the time of the receipt and at as and when it’s accrued it shall be recorded as revenue.

    Journal Entry for the same shall be:

    At the time of receipt of Tuition Fees-

    Cash  A/cDebitDebit the Increase in an Asset.
    Deferred Revenue A/cCreditCredit the Increase in a Liability.

    And at the time of recording revenue on monthly basis every month-

    Deferred Revenue A/cDebitDebit the Decrease in a Liability.
    Tuition Fees Earned A/cCreditCredit the Increase in an Income.

    Deferred Revenue is Presented in the Balance Sheet as –

    Deferred Revenue in Balance Sheet

    Conclusion

    Deferred revenue at the time of early receipt of the amount is recorded as a liability and at the time of actual income recorded as revenue in the income statement.


    Aastha Mehta.

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  1. This answer was edited.

    Before I give you the examples of deferred revenue I would first like to explain what deferred revenue means. Meaning of Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services. ExRead more

    Before I give you the examples of deferred revenue I would first like to explain what deferred revenue means.

    Meaning of Deferred Revenue

    Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

    Examples of Deferred Revenue

    1. Yearly Subscription to a Magazine: An entity engaged in publishing magazines generally charges a yearly subscription for sending the magazines at a predetermined time intervals to the subscribers. Such an entity charges a yearly subscription the amount received is a perfect example of deferred revenue. The Accounting Treatment for the Same is
      The entity will first record deferred revenue as

      Cash  A/cDebitDebit the Increase in an Asset.
      Deferred Revenue A/cCreditCredit the Increase in a Liability.

      At the time of actual accrual of revenue i.e at the time of recording earned revenue-

      Deferred Revenue A/cDebitDebit the Decrease in a Liability.
      Subscription Revenue A/cCreditCredit the Increase in an Income.
    2. Other Subscriptions: another example is the subscription charged by Amazon, Netflix, Hotstar etc. for getting access rights to download or watch the content on the website or such app. The charges are generally on a yearly or quarterly or monthly basis and thus in case if the customer buys a quarterly or a yearly plan such revenue is a deferred revenue since the services are not yet availed by the users.The company shall account such receipts and revenue as:
      when it receives such subscription amount-

      Cash  A/cDebitDebit the Increase in an Asset.
      Deferred Revenue A/cCreditCredit the Increase in a Liability.

      and when such revenue is accrued i.e customer has availed such service-

      Deferred Revenue A/cDebitDebit the Decrease in a Liability.
      Subscription Charges Earned A/cCreditCredit the Increase in an Income.
    3. Software license Fees: A software company generally charges the software license fees for using the entity’s software on the yearly or semi-annually or quarterly basis. Such fees are charged even before giving access rights. Hence, the company defers revenue. Accounting Treatment in the books of software company shall be:
      At the time of receipt of the license fee

      Cash  A/cDebitDebit the Increase in an Asset.
      Deferred Revenue A/cCreditCredit the Increase in a Liability.

      At the time of recognising revenue which may be monthly or quarterly or such other basis as per the entity’s policy-

      Deferred Revenue A/cDebitDebit the Decrease in a Liability.
      Software License Fees Earned A/cCreditCredit the Increase in an Income.
    4. Educational Institute: Coaching centres or the universities for higher education generally charge the course fee before commencement of each term. Thus the amount is received by such institute even before the services of imparting education has been rendered, This is a perfect example of deferred revenue. Such Educational Institute shall account this transaction as:
      At the time of receipt of such fee-

      Cash  A/cDebitDebit the Increase in an Asset.
      Deferred Revenue A/cCreditCredit the Increase in a Liability.

      and at the time of revenue recognition-

      Deferred Revenue A/cDebitDebit the Decrease in a Liability.
      Tuition Fees Earned A/cCreditCredit the Increase in an Income.

      I have tried giving as many examples as I could relate. I hope this answers your question.


      Aastha Mehta

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