Deferred Revenue | Examples | Journal Entry in Accounting

Deferred Revenue | Examples | Journal Entry in Accounting


hello everyone hi welcome to the channel
of WallStreetmojo friends today we are going to learn a concept which is known as
deferred revenue we are going to understand this in terms of income that
is from default and lost perspective as well as from the perspective of income
size so let’s begin and on from the income perspective on also on the
balance sheet side so let’s begin as you can see in this dialogue box there is a
definition which is it in four different revenue let’s read that and get into get
into the nitty-gritty of the same deferred revenue or revenue is the
payment of goods and service that the company has received from its customers
even before such goods and service have actually been delivered or performed
okay let me go this in complete detail for my now at the very initial State
this kind of payment has been actually been received it is received by the
company but the fun factor we hear is that it does not yet been owned by the
company that’s the you can see a starting difference I mean you can see
that you know the company reports is it as a default revenue as a liabilities then an asset till time it actually delivers the product or service so refer trivet you
are also known as your earned which has not been earned revenue or it is also
known as your deferred income care let’s understand this with the help of an
example or default revenue example is that of
the magazine which you subscribe on monthly basis right subscription
business well you know the revenue is a part of the business let’s suppose let’s
say a customer has subscribed a monthly magazine subscription of one year time
span okay it has paid the whole amount let’s assume that the customer pays are
closely to $1200 for that one particular you okay so for that 1 year magazine
subscription now the customer will receive the first edition as soon as he
pays and the rest 11 of those magazines will be delivered in future that will be
delivered in terms of in future case and it will be known as your own own revenue
as a deferred revenue liability now as the company starts delivering this
magazines the company will realize from this unearned revenue liability to the
assets part so there are some examples that you should note that you should
understand that fall in this particular topic of deferred River
there are thing called service contracts which is our first example then we have
something which is known as the insurance contracts the third is that is
feed-in it once we have fourth one in our list you must be familiar with this
also tickets for events like sports events or you have your concerts those
those are the things that form part of this particular topic that’s different
ribbon now different revenue on the balance sheet have you ever thought
about it like how it will be reported on the balance sheet side you see normally
this default revenue or the balance sheet is reported under the current
liabilities second if the default revenue is not expected to be realized
as the actual revenue then it it can be reported as long-term liability okay now as we as we are gonna see
through an extract of salesforce.com let me show you first now this is the
new extract of the sales force therefore income which has been reported under the
current liability section as you can see this is a report under the current
liability section it’s 7,094,705 18 financially 18 and 55 closely to that
5,54,802 to financial year 17 right so this is a
example of our what we call as sales force now what I’ll make you do is you
know the differed of any examples of sales holes in our deferred income for
in in sales force consists of billing to customers for their subscription
services now most of the subscriptions and and then support services are issued
with the annual terms resulting in the preferred income or deferred income over
here in Salesforce is reported as the largest in January quarter and where
most of the large enterprises accounts by their subscription services what we
need to note that the Salesforce follows the fiscal year with the 31st of Jan
here it so that’s that’s the difference now let’s understand this from the
accounting point of view in the deferred revenue example suppose let’s say if
company XYZ if they hire a housekeeping company called MNC to look after the
cleaning and maintenance of its offices so the contract is for let’s say for the
term of 12 months then company XYZ pays $12,000 in advance for year
phase for a year and we’ll record it as a default revenue accounting now how will
the entry will go in this particular scenario it will be cash account that
will be debited which will be twelve 12000 to the deferred revenue account
which will be 12000 that’s gonna be the difference so this
is how the default driven in the balance sheet will look something like this
there will be assets that will be standing less you sorry your assets is
equal to your liabilities or your liability plus your shareholders equity
I’m just gonna write SE so in asset side as you can see the cash is debited
so the cash has to increase by 12,000 as simple as that over here in terms of
liability the deferred revenue will increase by 12,000 as your current
liability and shareholders equity will be no impact at all okay now let’s say
after working for a month MNC earned 1,000 I’m writing over here after one
month MNC and let’s say $1,000 that is it has provided its service to XYZ and
does it will accrue it’s earning so our entry is gonna be something like this
deferred revenue account that will be debited with the amount of 1,000 to
service revenue which is going to be 1,000 okay
so hence 1,000 of deferred income will be recognized as service revenue and
service revenue will in turn affect the profit and loss account in the
shareholders equity so this time things will look something like this I’m gonna
broaden up this spot so that because these are the headings and it requires
some space to write well in asset side there’ll be no impact but on the
liability side the deferred revenue will decrease by 1,000 as your current
liability and over here on the shoulders equity side your service revenue will
increase by 1,000 because that affects your retain earnings your re that is
retain earnings so after learning the accounting part and learning all the
concepts on the the deferred revenue part let me give you some final thoughts
on this particular topic deferred revenue accounting is important concepts
to avoid any misreporting of assets and liabilities because it’s this is majorly
important for companies which gets advance payments before delivers its
products or service so the bottom line here is is that once the company
receives money in you of the goods and services what we call has to be done in
future it should be reported as they deferred income a liability and it will
realize such revenue only after those goods and services have been provided to
the customers so now if the company realizes the revenue as it receives the
money it will overstate its sales however you know the deferred income are
the important to the company as they help to manage its finance finance is
actually and uncovers the cost of operating activities so that’s it enough
for now for this particular topic thank you everyone for joining the session
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