Deferred revenue or unearned revenue is the amount of advance payments which the company has received for the goods or services which are still pending for the delivery or provision respectively and its examples include like an annual plan for the mobile connection, prepaid insurance policies, etc.
Top 4 Examples of Deferred Revenue
In this article, we will discuss some of the examples of Deferred Revenue to understand it in depth. We can find thousands of examples of Deferred Revenues but some of them are so important to understand as these kinds of transactions most of the firms will be having in their books.
Following are the examples which explain the common transactions in Deferred Revenues.
Deferred Revenue Example #1 – Magazine Subscription
As per our understanding, the best examples of the companies who earn deferred revenue are magazine publishing or leasing companies.
Let’s take an example of a magazine company which publishes monthly magazine but collects its yearly subscription in advance. The whole amount of yearly subscription is not the part of the monthly revenue, but the company earns part of this subscription amount monthly and transfer a monthly portion of this subscription each month for calculation monthly P&L account.
Suppose, a monthly subscription of the magazine is INR 200/- but company collects INR 2400/- from the customer as an advance for a yearly subscription. Each month the company will transfer INR 200/- from INR 2400/- to monthly P&L account once the company delivers monthly publication of the magazine to the customer and the rest amount will become deferred revenue in the Balance sheet for the next month. So, each month the company will transfer the 1/12 portion of the total amount collected from the customer from Deferred revenue to monthly revenue hear in the P&L account.
The journal entry for the same transaction would be as follows,
Each month after delivery of the magazine to the customer, the accountant will transfer INR 200/- from the deferred revenue account to Subscription Revenue account in P&L as per the shown in the journal entry below and in the same way each month, the whole amount from deferred revenue account would be taken care of at the end of the year.
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Deferred Revenue Example #2 – Software Leasing
Let’s consider another example to understand Deferred Revenue.
We can see a software manufacturing company which manufacture antivirus for computers. Software companies collect annual prepayment for the use of the software which is supposed to be used on a monthly basis by the customer. The company will receive a total amount for the 12 months and transfer this amount to Deferred Revenue head at the time of receiving the prepayment amount. Each month, the company will transfer the 1/12 portion of this amount to actual revenue head in the P&L account for the month when the customer is using that software.
Suppose the cost for the antivirus software is INR 1200/- annually which customer is paying in advance. The journal entry for this transaction as per below:
Deferred Revenue Example #3 – Auto Leasing
As we have understood from previous examples that Deferred Revenue is advance payment for any goods and services which would be delivered in the future. Sometimes it also referred to as Unearned Revenue also.
Let’s understand this from another example. A bus leasing company has signed a work contract with an IT company to provide its buses on annual leasing basis of INR 12000/- each bus, which would be payable in advance at the time of starting the contract.
In this case, the IT company will transfer INR 12,000/- for each bus to the leasing company as an annual advance payment for its services. The leasing company will record this transaction to its Deferred Revenue head in its liability side of the balance sheet as they have to deliver their services for the next 12 months but received the whole amount in advance.
The journal entry for this transaction would be as follows,
Deferred Revenue Example #4 – Gym Membership Fees
The best example to understand Deferred revenue is Gym Membership which is annually charged by Gym organizers as advance payment giving gym services for the next 12 months.
Suppose Gold Gym sells its membership plan for 6000/- per annum which is INR 500/- per month, but it collects the whole amount for membership in advance from the customers. Mr A wants to join Gold gym and transfers INR 6000/- to Gold Gym Account. The accountant will account this transaction into Deferred Revenue head as the services for the same amount has not been delivered yet, and the same would be provided in the next 12 months.
The accounting journal entry would be as follows,
Each month the accountant will transfer monthly membership fees to its membership fees account in the P&L as follows,
In this way each month, the accountant will transfer monthly membership fees to its P&L and at the end of the 12th month, the whole deferred revenue account will be taken to membership fees accounts.
So, from the above examples, we can understand that what is basically Deferred Revenue and how to do accounting for this.
The following kind of organizations will be dealing with deferred liabilities,
- Software leasing companies, Auto leasing companies who collect leasing amount annually for their services.
- Insurance Companies who issues insurance policies for General Insurance, Health Insurance, etc. These companies collect insurance premium as an advance on an annual basis and they will cover any claims for the next 12 months or as per the policy structure.
- Any professionals who collect retainer fees (Audit firms, Lawyers, Business Consultants). These professionals collect annual retainer fees in advance and provide their professional services as per the contract signed between them and the client.
- Any businesses which collect subscription fees such as magazines, grocery delivery companies.
- All those companies which have membership fees, such as Gyms, clubs, etc.
From the above examples, we have understood that Deferred Revenue is an advance payment for any goods and services which would be delivered or serviced in the future. It will be transferred to Deferred Revenue accounting head in the liability side of the balance sheet. It is also called Unearned Revenue which will be earned in the future but collected in advance itself.
It could be considered as debt also as clients will give you advance payment for any goods and services which you are going to deliver in the future, but this extra cash you can use for your business. It’s a kind of line of credit.
This has been a guide to Deferred Revenue Examples. Here we discuss top 4 practical examples of deferred revenue like Magazine Subscription, Software Leasing, Auto Leasing, and Gym Membership Fees, etc. You can learn more about accounting from the following articles –