Deferred revenue occurs when a customer pays a company for future goods or services. For example, a customer might buy tickets for a future theater performance or buy a software license for current and future use. The company cannot record the payment as income on its books because it has yet to earn or fully earn the money. Instead, the payment counts as deferred revenue until the company has earned it, at which point it is converted to revenue.
1. Calculate the portion of the income that you will earn this fiscal year. For example, if a customer buys a $1,260 3-year membership to a gym starting in February, and the fiscal year finishes at the end of May, the gym will earn four out of 36 months of the income this year.
2. Multiply the total income by this fraction. In this example, $1,260 × 4/36 = $140. The gym should record $140 as income on the year's financial statement.
3. Subtract the earned income from the total income. In this example, $1,260 - $140 = $1,120. The year's financial statement must record $1,120 as an asset under "cash" and as a liability under "deferred revenue."
- "The Simplified Guide to Not-for-Profit Accounting..."; Laurence Scot; 2010
- Jacksonville State University: Adjusting Journal Entries
- "Fair Value Accounting Fraud..."; Gerard M. Zack; 2009
- "Financial Accounting: The Impact on Decision Makers"; Gary A. Porter and Curtis L. Norton; 2010
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