Deferred Revenue

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What is Deferred Revenue?

Example of Deferred Revenue

What is Deferred Revenue?

Deferred Revenue is money received by a company in advance of having earned it. In other words, deferred revenues are not yet revenues and therefore cannot yet be reported on the income statement as such. As a result, the unearned amount must be deferred to the company's balance sheet where it get's reported as a liability.

Example of Deferred Revenue

To illustrate deferred revenue, let's assume that a company designs websites and has been asked to provide a price quote for a new website. The design company states that it can complete the new website for $70,000. The terms require a payment of $30,000 at the time the contract is signed and $40,000 at the end of the project, which is estimated to take 60 days. The company agrees to begin working on the project 10 days after the $30,000 is received.

Now let's assume that on December 27, the design company receives the $30,000 and it will begin the project on January 4. Therefore, on December 27, the design company will record a debit of $30,000 to Cash and a credit of $30,000 to Deferred Revenues. On December 31, its balance sheet will report a current liability of $30,000 with the description Deferred revenues.

As of January 31 the company has completed 2/7 of the work. Therefore, it will record an adjusting entry dated January 31 that will debit Deferred Revenues for $20,000 and will credit the income statement account Design Revenues for $20,000. Thus, the January 31 balance sheet will report Deferred revenues of $10,000 (the company's remaining obligation/liability from the $30,000 it received on December 27).