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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/c | Debit | Debit the Increase in an Asset. |
| Deferred Revenue A/c | Credit | Credit the Increase in a Liability. |
And at the time of recording revenue on monthly basis every month-
| Deferred Revenue A/c | Debit | Debit the Decrease in a Liability. |
| Tuition Fees Earned A/c | Credit | Credit the Increase in an Income. |
Deferred Revenue is Presented in the Balance Sheet as –
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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No, Goodwill is not a fictitious asset. What is Good Will? Goodwill of an entity is an intangible asset. It can be said that it's the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is wilRead more
No, Goodwill is not a fictitious asset.
What is Good Will?
Goodwill of an entity is an intangible asset. It can be said that it’s the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is willing to pay the higher amount reasons such as brand image, modernised technology, high-grade employee relationships etc.
The goodwill is valued at the time of the merger of two or more entities or acquisition of one by another entity.
It is generally noticed that better the organisation’s reputation higher is the value of goodwill.
What is a Fictitious Asset?
Fictitious means “Bogus” or “Untrue” and asset means anything beneficial for the organisation.
Thus fictitious assets are not an asset but just the expenses or losses which can not be accounted for in the current reporting period rather are to be written off in the future reporting period.
For Example,
Why is goodwill not a fictitious asset?
Goodwill is an intangible asset and not a fictitious asset. A fictitious asset does not have a realizable value as it is merely an expenditure incurred by the company. It does not have a tangible existence either. Whereas goodwill has a monetary value i.e it has a realizable value even though it has no tangible existence. Hence, it’s an intangible asset.
Goodwill is presented in a balance sheet as –
Aastha.
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