Recognition of Deferred Revenue

Following is the Journal entry of deferred revenue:-

Deferred income recognition refers to the process of recognizing revenue from deferred income, which is the payment received by a company for goods or services that it has not yet provided to the customer.

The steps for recognition of deferred revenue typically involve the following:

• Record the cash received as a liability:
  When the company receives the payment for the goods or services, it records it as a liability on the balance sheet, under the category of “Deferred Income” or “Unearned Revenue.”
• Determine the revenue recognition method:
  The company must determine when and how to recognize the revenue from the deferred income, based on the nature of the goods or services provided. The revenue recognition method can be either the accrual method or the cash method.
• Fulfill the obligation to the customer:
  The company provides the goods or services to the customer according to the terms of the contract or agreement. The company must ensure that it fulfills its obligation to the customer before recognizing the revenue.
• Recognize the revenue:
  Once the company has fulfilled its obligation to the customer, it can recognize the revenue. The amount of revenue recognized is typically the portion of the deferred income that relates to the goods or services provided. The company records the revenue on the income statement and reduces the deferred income liability on the balance sheet.
• Repeat the process:
  If the company has multiple deferred income items, it must repeat the above steps for each item until all the obligations are fulfilled and the revenue is recognized.

Overall, the recognition of deferred revenue process involves careful management of liabilities and revenue recognition, ensuring that the company fulfills its obligation to customers and recognizes revenue in accordance with accounting principles.

Here are sample journal entries for deferred revenue:

Initial Receipts:

Recongnition (monthly over 12 months):