What is the Journal Entry for Deferred Revenue?

What is Deferred Revenue?

In accounting, deferred revenue, also called deferred income, is an important concept to understand.

Deferred income refers to the money received in advance for goods or services that are not yet provided. In other words, the customer has paid for the goods or services upfront, but won’t receive them until a later date.

In accordance with the matching principle in accounting, and under accounting standard IFRS 15, the business cannot recognise the payment as revenue on their income statement until the goods or services are provided.

Instead, the payment is recorded as deferred revenue on the balance sheet.

Once the goods or services are provided to the customer, the business can then recognise the payment as revenue and reduce the deferred income balance accordingly.

Using a real life example, if a customer pays for an educational course upfront, but the course doesn’t start for a couple of months, the business has received the customer’s cash, but can’t recognise it as revenue until the course has been delivered.

This helps to reflect a more accurate representation of a business’s income.

This is a fundamental aspect of bookkeeping and accounting, and understanding the debits and credits involved is vital as an accountant.

Accounts Involved in Journal Entry for Deferred Revenue

When recording the accounting transaction for deferred income, there are three accounts involved:

The Deferred Revenue account
The Revenue account
The Cash account

Deferred Revenue Account	Credit/Debit	Liability	Credits increase the liability value. Debits decrease the liability value.
Revenue Account	Credit	Income	Credits increase income value
Cash Account	Credit	Asset	Credits decrease the asset value

Using the DEAD CLIC mnemonic to understand the debits and credits:

The Deferred Revenue account is a liability, as it is a financial obligation between two parties that hasn’t yet been fulfilled or paid in full. The two parties in this example would be the company and the customer.

The Revenue account is classed as income, and is the money generated by the company through selling goods and services from normal business operations.

The Cash account in an asset, as it contains economic value and/or future benefit

Example of Journal Entry for Deferred Revenue

Let’s take a look at an example of a journal entry for deferred revenue, from the initial recognition of deferred revenue, through to when the customer actually receives the goods or services:

Step 1: Journal Entry for Initial Recognition of Deferred Revenue

A business sells a service to renovate a customer’s garden. The customer pays £10,000 cash up front, but the work won’t be carried out for a couple of months, as the business has other jobs in its pipeline to complete first.

Therefore, the journal entry to record this transaction would be:

Cash	Debit	Balance Sheet	£10,000
Deferred Revenue	Credit	Balance Sheet	£10,000

We are recognising that we have received £10,000 cash – in other words, our bank account has increased. As the cash account is an asset, we would increase this by debiting the account.

We would also recognise that we have received deferred income too. As the Deferred Revenue account is a liability, we would increase this by crediting the account.

Step 2: Journal Entry Once Goods/Services Have Been Delivered

Two months have passed, and the company has started work on the garden renovation.

Once the renovation is complete, we can clear out the credit that is currently in the Deferred Revenue account on the balance sheet, and recognise the £10,000 as actual revenue in the revenue account on the income statement.

To do this, the journal entry would be:

Deferred Revenue	Debit	Balance Sheet	£10,000
Revenue	Credit	Income Statement	£10,000

As the Deferred Revenue Account is a liability, we would decrease that liability by posting a debit for £10,000 – this effectively offsets the initial journal entry in the Deferred Revenue Account.

We would also increase the Revenue Account by crediting that account, which increases the businesses recognised income.