There are a number of variations with regard to revenues based on the conditions they are been recorded. Deferred revenue and recognized revenue are two such types of revenues that may be confusing. The key difference between deferred revenue and recognized revenue is that in deferred revenue, an income is received before the products are delivered, while in recognized revenue, the cash payment may be received after the goods are delivered. However irrespective of the cash receipt, the transfer of goods has to be recorded as a sale.
CONTENTS
1. Overview and Key Difference
2. What is Deferred Revenue
3. What is Recognized Revenue
4. Side by Side Comparison – Deferred Revenue vs Recognized Revenue
5. Summary
What is Deferred Revenue?
Deferred revenue is an income that was received by a company in advance of earning it; thus, it is not yet revenue. Deferred Revenue is also called ‘unearned revenue’ since the revenue is yet to be earned. Following the recipient of a deferred revenue, the company has an obligation to deliver goods or services to the customer at a future date. Since this is a prepayment from the customer’s point of view (customer already paid in cash), the company has to record this as a current liability.
Companies who provide subscription based products often have to account for deferred revenue since the payment will be usually made at the beginning of the year and the products will be delivered every month.
How to Record Unearned Revenue
Let’s look at it with an example.
E.g. KLM Ltd. sells magazines on a subscription basis and receives a payment of $840 from a customer in January as the charge for the entire year. The monthly charge for one magazine is $70. ($70*12 = $840). Upon the receipt of cash,
Cash A/C DR$840
Deferred Revenue A/C CR$840
As the time progresses and the magazine is delivered to the customer, the following entry will be recorded.
Deferred Revenue A/C DR$70
Cash A/C CR$70
At the end of the financial year, the entire deferred revenue will be reversed and booked as revenue.
Deferred Revenue A/C DR$840
Revenue A/C CR$840
However, if a customer made an up-front prepayment for services that are expected to be delivered over several years, the portion of the payment that pertains to services or products to be provided after 12 months from payment date must be categorized as deferred revenue under the long-term liability section of the balance sheet.
Figure 1: Subscription based sales are a sound example for Deferred Revenue.
What is Recognized Revenue
Here the revenue will be recognized and recorded as soon as the business transaction is conducted. In other words, the revenue is already earned. If the sale is made on credit, then the cash payment will be received at a later date. Irrespective of that, the sale of goods is recorded as follows.
This is in line with the accruals concept, which states that all the revenues and expenses that belong to the current accounting period should be recorded irrespective of whether cash payment is received or not.
How to Record Recognized Revenue
Let us see how to record a recognized revenue through an example.
E.g. LMN Ltd made a credit sale of $700 to EFG Ltd. Accounting entry for the sale will be,
- When the sale is made,
EFG Ltd A/C DR $700
Sales A/C CR $700
- When cash is received at a later date,
Cash A/C DR $700
EFG Ltd A/C CR $700
What is the difference between Deferred Revenue and Recognized Revenue?
Deferred Revenue vs Recognized Revenue |
|
| Deferred Revenue is received before products are delivered. | Recognized Revenue is an income recognized in accounting books upon the completion of the sale. |
| Type of Revenue | |
| Deferred Revenue is an unearned revenue | Recognized Revenue is an earned revenue. |
| Type of Companies | |
| This is recorded by companies that deliver a product/service in the future for a payment received in the present. | Recognized Revenue is a common practice used by companies who conduct credit sales. |
Summary – Deferred Revenue vs Recognized Revenue
Both deferred revenue and recognized revenue is accounted for in accordance with accounting principles. The difference between deferred revenue and recognized revenue exists mainly due to the differences between the time period when the sale is made and when the payment is received.
Reference:
1. “Deferred Revenue.” Investopedia. N.p., 02 Dec. 2014. Web. 21 Feb. 2017.
2. “What Types of Industries Have Unearned Revenue?” Chron.com. N.p., n.d. Web. 21 Feb. 2017.
3. “Realized vs. Recognized Income.” The Finance Base. N.p., n.d. Web. 21 Feb. 2017.
4. “Deferred Revenue Journal Entry.” Double Entry Bookkeeping. N.p., 06 Nov. 2016. Web. 21 Feb. 2017.
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