Deferred Revenue Journal Entry

A deferred revenue journal entry is needed when a business supplies its services to a customer and the services are invoiced in advance.

For example, suppose a business provides web design services and invoices for annual maintenance of 12,000 in advance. At the time of invoicing the service has not been provided and the service revenue has not been earned, it therefore needs to be credited to the deferred revenue account.

Deferred revenue is sometimes referred to as unearned revenue.

The deferred revenue journal entry will be as follows.

Deferred Revenue Journal Entry

The accounting records will show the following bookkeeping entries for the web design maintenance services invoiced in advance:

Deferred Revenue Journal Entry
Account Debit Credit
Accounts receivable 12,000
Deferred revenue account 12,000
Total 12,000 12,000

Deferred Revenue Journal Entry Bookkeeping Explained

Debit
The customer owes the business the money for the services until they are paid for. The business now has an asset (trade accounts receivable or trade debtor) for the amount due.

Credit
The service has not yet been provided to the customer and the service revenue is not treated as recognized revenue, it is credited to the balance sheet deferred revenue account until earned.


Accounting Equation for Deferred Revenue Journal Entry

The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the total equity of the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.

Deferred Revenue Journal Entry Accounting Equation
Assets = Liabilities + Owners Equity
Accounts receivable = Deferred revenue account + None
12,000 = 12,000 + 0

In this case one asset (accounts receivable) increases representing money owed by the customer, this increase is balanced by the increase in liabilities (deferred revenue account). The credit to the deferred revenue account represents a liability as the service still needs to be provided to the customer.

Deferred Revenue Recognition

Deferred revenue recognition will happen as soon as the service is provided.

In the above example, the maintenance contract costs 12,000 for 1 year, assuming the business produces monthly management accounts, each month 1,000 will be become recognized revenue and credited to the services revenue account in the income statement with the following journal entry

Journal Entry for Deferred Revenue Recognition
Account Debit Credit
Deferred revenue account 1,000
Service revenue account 1,000
Total 1,000 1,000

At the end of 12 months all the deferred revenue (unearned revenue) will have been taken to the service revenue account (earned revenue).

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