Normal Balance Of Deferred Revenue

Valuing the deferred revenue liability would mainly be important in a business combination situation.

Normal balance of deferred revenue. Deferred revenue is classified as either a current liability or a long term liability. Since the service was performed at the same time as the cash was received the revenue account service revenues is credited thus increasing its account balance. The credit to the deferred revenue account represents a liability as the service still needs to be provided to the customer. The company receives cash an asset account on the balance sheet and records deferred revenue a liability account on the balance sheet.

When the company receives payment. Let s illustrate how revenues are recorded when a company performs a service on credit i e the company allows the client to pay for the service at a later date such as 30 days from the date of the invoice. The deferred revenue account typically has which type of normal balance. How business combinations affect deferred revenue valuation.

This classification depends on how long it will take the company to earn the revenue. The normal balance of any account is the balance debit or credit which you would expect the account have and is governed by the accounting equation. Record the deferred revenue. Each of the accounts in a trial balance extracted from the bookkeeping ledgers will either show a debit or a credit balance.

In the example from part 1 the company receives a 120 advance payment relating to a twelve month magazine subscription. Deferred revenue or unearned revenue refers to advance payments for products or services that are to be delivered in the future. It can be classified as a long term liability if performance is not expected within the next 12 months. Deferred revenue also known as unearned revenue typically refers to advance payments a company receives for products or services that are to be delivered or performed in the future.

The deferred revenue account is normally classified as a current liability on the balance sheet. Deferred revenue recognition will happen as soon as the service is provided. In the above example the maintenance contract costs 12 000 for 1 year assuming the business produces monthly. Recording deferred revenue applies to the company s balance sheet.

If your company has deferred revenue even for longer than a 12 month period it would follow the relevant accounting guidance to report its deferred revenue on the financial statements.