Can someone give examples of deferred revenue?

-This question was submitted by a user and answered by a volunteer of our choice.

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 the 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

  • Yearly Subscription to a Magazine: An entity engaged in publishing magazines generally charges a yearly subscription for sending the magazines at 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/c Debit Debit the Increase in an Asset.
Deferred Revenue A/c Credit Credit 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/c Debit Debit the Decrease in a Liability.
Subscription Revenue A/c Credit Credit the Increase in an Income.

 

  • 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 for such receipts and revenue as:
    when it receives such subscription amount-
Cash  A/c Debit Debit the Increase in an Asset.
Deferred Revenue A/c Credit Credit the Increase in a Liability.

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

Deferred Revenue A/c Debit Debit the Decrease in a Liability.
Subscription Charges Earned A/c Credit Credit the Increase in an Income.
  • Software license Fees: A software company generally charges the software license fees for using the entity’s software on a 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 companies shall be:
    At the time of receipt of the license fee
Cash  A/c Debit Debit the Increase in an Asset.
Deferred Revenue A/c Credit Credit 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/c Debit Debit the Decrease in a Liability.
Software License Fees Earned A/c Credit Credit the Increase in an Income.
  • Educational Institute: Coaching centres or the universities for higher education generally charge the course fee before the 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/c Debit Debit the Increase in an Asset.
Deferred Revenue A/c Credit Credit the Increase in a Liability.

 

and at the time of revenue recognition;

Deferred Revenue A/c Debit Debit the Decrease in a Liability.
Tuition Fees Earned A/c Credit Credit the Increase in an Income.

 

 



 

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