Use deferred revenue accounting to generate accounting entries that defer revenue recognition based on a revenue recognition date and proration method that you select. Accounting for Deferred Revenue. Definition: The deferred revenue, also called unearned revenue, is advanced payments made for products and services that will be delivered to the customer at a future date.This is a liability because the company still owes the customer a good or service at the time this is recorded. Since deferred revenues are not considered revenue until they are earned, they are not reported on the income statement. For this transaction the accounting equation is shown in the following table. It is majorly essential for Companies that get advance payments before it delivers its products and services. Instead they are reported on the balance sheet as a liability. As you deliver goods or perform services, parts of the deferred revenue become earned revenue. The following example analyzes changing the method of accounting for deferred revenue from an impermissible method to a permissible method. Any revenue received in advance of the delivery of goods or services is considered deferred revenue. Deferred revenue is sometimes called unearned revenue, deferred income, or unearned income. Example: Taxpayer C, a C corporation, has adopted its fiscal year end of December 31 as its tax year end. Originally Posted: February 13, 2018 . Topics: Revenue. The company has elected the accrual method of accounting for tax purposes. The supported revenue recognition basis includes contract date, order date, ship date, and … Author: Elizabeth Hamilton Foley. As the income is earned, the liability is decreased and recognized as income. Sponsors | Contact Us Terms & … The designation is an important accounting tool that helps to keep the records straight on what has and has not occurred. Deferred Revenue. What Does Deferred Revenue … The bottom line Deferred or unearned revenue is an important accounting concept, as it helps to ensure that the assets and liabilities on a balance sheet are accurately reported. In this installment of the Nonprofit Accounting Basics educational webinar series, Bess Foley discusses deferred revenue--one of the six basic accrual concepts. Deferred Revenue and Accrual Accounting When a company uses the accrual accounting method, revenue is only recognized as earned when money is … Here's how it works and why it's so important for businesses. In this case one asset (accounts receivable) increases representing money owed by the customer, this increase is balanced by the increase in liabilities (deferred revenue account). Deferred revenue accounting is a critical concept to avoid misreporting of assets and liabilities.