Professional Documents
Culture Documents
Examples:
1) If a company invoices its customer for 100 units of item A, and ships (delivers) only 25 units,
the company cannot recognize revenue for entire 100 items. It can only recognize revenue
equivalent to the number of units delivered (Revenue is earned only when the products are
delivered). Similarly, lets say you pay $120 in advance to company ABC for magazine
subscription for one full year. The fact that company ABC received money for one full year
does not mean that they can record the entire amount as Revenue. In-fact the amount received
in advance is a Liability to the company because they have to deliver magazines to their
customer every month and if they fail to do so, they are liable to refund the amount received in
advance. In this scenario, the company will recognize 1/12th of the entire amount every month
as earned revenue after they deliver the magazine.
2) Company ZXC signs a 3 year support contract with its client for a total amount of 3 million.
This amount cannot be recorded as revenue unless the Company provides the support services
to the client. Assuming the company is following a monthly calendar accounting period, the
company will recognize 1/36th of the entire support contract deal amount every month.
(Revenue is recognized when services are performed)
There are few exceptions to the timing of revenue recognition for sale of inventory items. Under
normal scenario, revenue is recognizes at the point of sale, however if there are return policies,
and if the company cannot reasonably estimate the amount of future returns, the revenue
should be recognized only after the expiration of the return policy period.
Accounting Class
Receivables
1-Jan
Deferred
Revenue
Debit
12000
Credit
Comments
The entire receivables is
recognized in advance.
How this receivable is
collected will depend on
the payment terms of the
Invoice
12000
End of Jan, Revenue is recognized for 1/12th of the entire amount, because the company has
provided one months service to its client. To that effect, Deferred Revenue will be reduced and
revenue will be recognized
Date
31-Jan
31-Jan
Accounting
Class
Deferred
Revenue
Earned Revenue
Debit
Credit
1000
1000
Comments
Deferred Revenue
reduced
Earned Revenue amount
for one month
Date
28-Feb
28-Feb
Accounting
Class
Deferred
Revenue
Earned Revenue
Debit
Credit
1000
1000
Comments
Deferred Revenue
reduced
Earned Revenue amount
for one month
The company will have similar accounting entry each month till Dec. At the end of Dec, the
Deferred Revenue will be Zero and the entire amount will be reported as Revenue earned.