The  $ 2,200 prepaid expense represents 11 months of insurance protection that remains as a future benefit. Also, when an advance payment is made to cover a certain number of months, as the months go by, a certain amount of deferred revenue is earned. This amount that is earned is what is recorded as the deferred revenue adjusting entry.

When you paid your tuition for the semester, you paid “up front” for about three months of service (the courses you are taking!) As each month you attend class passes, you have one fewer month to go in terms of what you paid for. If you want to attend school after the semester is over, you have to prepay again for the next semester. Here are the ledgers that relate to the purchase of prepaid rent when the transaction above is posted. Here are the ledgers that relate to the purchase of prepaid insurance when the transaction above is posted.

On December 31, 2021, the end of the accounting period, 1/3 of the rent received has already been earned (prorated over 3 months). In this journal entry,  the company recognizes $500 of revenue for the bookkeeping service the company has performed in October 2020. Likewise, the remaining balance of deferred revenue for the bookkeeping service here will be $2,500 (3,000 – 500). This journal entry is to eliminate the liability after the company has fulfilled its obligation. At the same, it is also made to recognize the revenue that the company earns after it has delivered goods or performed the services during the period. Generally accepted accounting principles (GAAP) require certain accounting methods and conventions that encourage accounting conservatism.

Unearned Fees – Deferred Revenue

The word “revenue” implies that the company has completed work for a customer. Fees are amounts that a company charges customers for performing services for them. A customer may pay the company immediately after the job is complete. The point is that a business has to select payment options that are reasonable and appropriate for their situations and circumstances and require payments in reasonable increments. A business license is a right to do business in a particular jurisdiction and is considered a tax.

• Further, the company has a liability or obligation for the unpaid interest up to the end of the accounting period.
• Accrued revenues are common at the end of the year when we are doing work but have not recorded the revenue yet.
• The remaining $900 in the Supplies account will appear on the balance sheet.
• Likewise, the company needs to properly make the journal entry for this type of advance payment as deferred revenue, not revenue.
• Any remaining balance in the asset account is what you still have left to use up into the future.
• If you DON’T “catch up” and adjust for the amount you used, you will show on your balance sheet that you have $12,000 worth of prepaid rent at the end of the month when you actually have only $11,000 remaining.

The company can make the deferred revenue journal entry by debiting the cash account and crediting the deferred revenue account. Hence, deferred revenue is treated as a liability and is converted from liability to actual revenue when the distribution or delivery of what the customer paid for has been done. Hence, the initial deferred revenue journal entry that was made when the prepayment was received will be adjusted to record when the company or individual delivers the goods or service to the customer.

Accruals & Deferrals

After the asset is fully depreciated, no further adjusting entries are made for depreciation no matter how long the company owns the asset. You prepaid a one-year insurance policy during the month and initially recorded it as an asset because it would last for more than one month. By the end of the month some of the insurance expired, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($1,100).

Accrued expenses:

Utilities provide the service (gas, electric, telephone) and then bill for the service they provided based on some type of metering. As a result the company will incur the utility expense before it receives a bill and before the accounting period ends. Hence, an accrual-type adjusting journal entry must be made in order to properly report holding more than 50% of shares ownership the correct amount of utilities expenses on the current period’s income statement and the correct amount of liabilities on the balance sheet. Common examples of when unearned revenue is recorded include a rent payment made in advance, prepaid insurance, annual magazine subscriptions, and services contracts or goods paid in advance.

Hence, as a liability, the deferred revenue journal entry will be a credit and an adjusting entry will be made later when the paid goods or services have been delivered. Further, the company has a liability or obligation for the unpaid interest up to the end of the accounting period. What the accountant is saying is that an accrual-type adjusting journal entry needs to be recorded. The adjusting entry for deferred revenue updates the Unearned Fees and Fees Earned balances so they are accurate at the end of the month. The adjusting entry is journalized and posted BEFORE financial statements are prepared so that the company’s income statement and balance sheet show the correct, up-to- date amounts. Deferred revenue is common with subscription-based products or services that require prepayments.

How to record a deferred revenue journal entry

Mr. Peter will record this $12,000 received as deferred revenue in his books which will be a liability to him. When an advance payment is made to cover a certain number of months, as the months go by, a certain amount of deferred revenue is earned. Hence, the deferred revenue to be earned for a month is calculated by dividing the advance amount received by the number of goods or months of services for which the amount is received. In accrual accounting, deferred revenue is treated as a liability and not as revenue, because it is the money paid to a business in advance before it actually delivers the products or services to the customer. Hence, the business is indebted to the customer and is obligated to deliver the products or service at a later date. In this article, we will discuss the deferred revenue journal entry with examples as well as the deferred revenue adjusting entry.

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You reduce what you owe her by $40 for the work performed that day – you have now earned that $40. You still owe her service, but now you only owe $60 instead of $100. For example, on September 28, 2020, the company ABC Ltd. received the $3,000 cash pre-payment for the six-month bookkeeping service from its client. Therefore, always consult with accounting and tax professionals for assistance with your specific circumstances.

During the month the company may earn some, but not all, of the cash that was prepaid if it performs some of the work for the customer but does not yet complete the job entirely. The company will wait until the end of the month to account for what it has earned. If the company DOES NOT “catch up” and adjust for the amount it earned, it will show on the balance sheet that it has $1,000 of service still due to the customer at the end of the month when it actually has only $400 still owed. In addition, on the income statement it will show that it did not earn ANY of the prepaid amount when in fact the company earned $600 of it. Likewise, this journal entry does not affect the income statement at all. What it does is simply increasing both assets and liabilities by $3,000.

It will be recognized as income only when the goods or services have been delivered or rendered. Unearned revenue, also known as unearned income, deferred revenue, or deferred income, represents proceeds already collected but not yet earned. Following the accrual concept of accounting, unearned revenues are considered as liabilities. You accepted cash in advance of doing a job during the month and initially recorded it as a liability. By the end of the month you earned some of this prepaid amount, so you reduced the value of this liability to reflect what you actually earned by the end of the month. To do this, Unearned Fees was debited for the amount earned and Fees Earned was credited to increase revenue by the same amount.