Examples of Deferred Revenue
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.
We can find thousands of examples of Deferred RevenuesDeferred RevenuesDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. , but some of them are so important to understand as these kinds of transactions most of the firms will be having in their books.
Top 4 Examples of Deferred Revenue
Example #1 – Magazine Subscription
Let’s take an example of a magazine company that publishes monthly magazine but collects its yearly subscription in advance. The whole amount of yearly subscription is not 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 the 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 sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. 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 the delivery of the magazine to the customer, the accountant will transfer INR 200/- from the deferred revenue account to the 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.
Example #2 – Software Leasing
We can see a software manufacturing company which manufacture antivirus for computers. Software companies collect annual prepaymentsPrepaymentsPrepayment refers to paying off an expense or debt obligation before the due date. Often, companies make advance payments for expenses as well as goods and services to shed their financial burden. Advance payments also act as a tool to attain monetary benefits. Examples of prepayment include loan repayment before the due date, prepaid bills, rent, salary, insurance premium, credit card bill, income tax, sales tax, line of credit, etc. 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 the 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 the 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 the customer is paying in advance. The journal entry for this transaction as per below:
Example #3 – Auto Leasing
A bus leasing company has signed a work contract with an IT company to provide its buses on the 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,
Example #4 – Gym Membership Fees
The best example to understand this concept is that of Gym Membership. It 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 for this transaction into the Deferred Revenue head as the services for the same amount have not been delivered yet, and the same would be provided in the next 12 months.
The accounting journalAccounting JournalAccounting journal, often known as the book of original entry, is first used to record the company's accounting record whenever a financial transaction occurs. It's difficult to comprehend, yet it's crucial in business operations and accounting. 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.
The following kind of organizations deal with deferred liabilities,
- Software leasing companies, Auto leasing companies who collect leasing amount annually for their services.
- Insurance Companies that issue insurance policies for General Insurance, Health Insurance, etc. These companies collect insurance premiums 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 feesRetainer FeesRetainer fee is an advance payment made to a professional for the services to be received in future. This arrangement is done to maintain the professionals relations established over the time and retain the professional. 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 transfer to the Deferred Revenue accounting head in the liability side of the balance sheet. Deferred revenue is also called Unearned RevenueUnearned RevenueUnearned revenue is the advance payment received by the firm for goods or services that have yet to be delivered. In other words, it comprises the amount received for the goods delivery that will take place at a future date., 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 creditLine Of CreditA line of credit is an agreement between a customer and a bank, allowing the customer a ceiling limit of borrowing. The borrower can access any amount within the credit limit and pays interest; this provides flexibility to run a business..
This has been a guide to Deferred Revenue Examples. Here we discuss the top 4 practical examples of deferred revenue like Magazine Subscription, Software Leasing, Auto Leasing, and Gym Memberships Fees, etc. You can learn more about accounting from the following articles –