Difference Between Deferred Revenue and Recognized Revenue

Key Difference – Deferred Revenue vs Recognized Revenue

There are a number of variations with regard torevenuesbased on the conditions they are been recorded. Deferred revenue and recognized revenue are two such types of revenues that may be confusing. The key difference between deferred revenue and recognized revenue is thatin deferred revenue, an income is received before the products are delivered, while in recognized revenue, the cash payment may be received after the goods are delivered. However irrespective of the cash receipt, the transfer of goods has to be recorded as a sale.

CONTENTS
1.Overview and Key Difference
2.What is Deferred Revenue
3.What is Recognized Revenue
4.Side by Side Comparison – Deferred Revenue vs Recognized Revenue
5.Summary

What is Deferred Revenue?

Deferred revenue is anincomethat was received by a company in advance of earning it; thus, it is not yet revenue. Deferred Revenue isalso called ‘unearned revenue’since the revenue is yet to be earned. Following the recipient of a deferred revenue, the company has an obligation to deliver goods or services to the customer at a future date. Since this is a prepayment from the customer’s point of view (customer already paid in cash), the company has to record this as a currentliability.

Companies who provide subscription based products often have to account for deferred revenue since the payment will be usually made at the beginning of the year and the products will be delivered every month.

How to Record Unearned Revenue

Let’s look at it with an example.

E.g. KLM Ltd. sells magazines on a subscription basis and receives a payment of $840 from a customer in January as the charge for the entire year. The monthly charge for one magazine is $70. ($70*12 = $840). Upon the receipt of cash,

Cash A/C DR$840

Deferred Revenue A/C CR$840

As the time progresses and the magazine is delivered to the customer, the following entry will be recorded.

Deferred Revenue A/C DR$70

Cash A/C CR$70

At the end of the financial year, the entire deferred revenue will be reversed and booked as revenue.

Deferred Revenue A/C DR$840

Revenue A/C CR$840

However, if a customer made an up-front prepayment for services that are expected to be delivered over several years, the portion of the payment that pertains toservices or productsto be provided after 12 months from payment date must be categorized as deferred revenue under the long-term liability section of thebalance sheet.

What is Recognized Revenue

Here the revenue will be recognized and recorded as soon as the business transaction is conducted. In other words, the revenue is already earned. If the sale is made on credit, then the cash payment will be received at a later date. Irrespective of that, the sale of goods is recorded as follows.

This is in line with theaccrualsconcept, which states that all the revenues and expenses that belong to the current accounting period should be recorded irrespective of whether cash payment is received or not.

How to Record Recognized Revenue

Let us see how to record a recognized revenue through an example.

E.g. LMN Ltd made a credit sale of $700 to EFG Ltd. Accounting entry for the sale will be,

• When the sale is made,

EFG Ltd A/C DR $700

Sales A/C CR $700

• When cash is received at a later date,

Cash A/C DR $700

EFG Ltd A/C CR $700

What is the difference between Deferred Revenue and Recognized Revenue?

Deferred Revenue vs Recognized Revenue
Deferred Revenue is received before products are delivered.	Recognized Revenue is an income recognized in accounting books upon the completion of the sale.
Type of Revenue
Deferred Revenue is an unearned revenue	Recognized Revenue is an earned revenue.
Type of Companies
This is recorded by companies that deliver a product/service in the future for a payment received in the present.	确认收入有限公司所使用的是一种常见的做法mpanies who conduct credit sales.

Summary – Deferred Revenue vs Recognized Revenue

Both deferred revenue and recognized revenue is accounted for in accordance with accounting principles. The difference between deferred revenue and recognized revenue exists mainly due to the differences between the time period when the sale is made and when the payment is received.

Reference:

1. “Deferred Revenue.” Investopedia. N.p., 02 Dec. 2014. Web. 21 Feb. 2017.
2. “What Types of Industries Have Unearned Revenue?” Chron.com. N.p., n.d. Web. 21 Feb. 2017.
3. “Realized vs. Recognized Income.” The Finance Base. N.p., n.d. Web. 21 Feb. 2017.
4. “Deferred Revenue Journal Entry.” Double Entry Bookkeeping. N.p., 06 Nov. 2016. Web. 21 Feb. 2017.

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