In accounting, deferrals are the accounts where the company has not realised the asset or liability until the next accounting period or a future date. Deferred revenue refers to the revenue that the company has not generated by delivering the goods or services to its customers. It is the payment that the customers have made to the company in advance for the goods or services that the company will provide them in the future.

Deferred revenue is the company’s liability. In the balance sheet, the accountants from an accounting firm in Johor Bahru would record the deferred revenue in the liability section. When the company has earned it, it will become the company’s revenue (Also see Understanding the Differences between Revenue and Turnover) . As an instance, XYZ Corporation received (Also see Do You Know What is Accounts Receivable?) a payment of RM10,000 from its customer for the goods that it has not manufactured or delivered. Then, it will record the RM10,000 as its liability on the balance sheet. Once it delivers the goods to the customer, it should write off the liability and take the amount as its income.

Now, let us study the journal entries that one should make when his company earns a deferred revenue.

For example, ABC Corporation has agreed to advertise for Mary Gifts Shop for the next three years, and the yearly advertising fees is RM15,000. Then, Mary Gifts Shop pays ABC Corporation RM45,000 in advance for the fees for those three years. To record this transaction, ABC Corporation will take RM15,000 as its income for that year, whereas the remaining RM30,000 will be in its balance sheet under the liability section. In the next two years, ABC Corporation will record that RM30,000 as its revenue subsequently.

What are the journal entries that the accountants will create in the books of accounts to record the deferred revenue of a company? By using the example above, ABC Corporation will debit RM45,000 to its bank account and credit the same to its deferred revenue account once it received the payment from Mary Gifts Shop. Then, during the year, ABC Corporation will debit RM15,000 deferred revenue and credit the profit and loss account with the same amount to recognise the amount earned in that year. It will do the same for the next two years to recognise the income and write off the liability.

In short, deferred revenue is the amount of revenue that the customers have paid to the company in advance for the sale of goods or services in a certain accounting period. The accountants will only recognise a small part of it as the earned revenue (Also see Are Sales and Revenue the Same?) and the amount remaining will show up in the balance sheet as the company’s liability.