Questions and Answers
What is deferred revenue?
What happens to deferred revenue as goods or services are provided?
The liability is extinguished because the revenue is earned.
Revenue is recognized when cash is collected, regardless of whether goods or services have been delivered.
False
List two accounts that represent deferred revenue.
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A liability is recognized upon receipt of cash and is extinguished when the revenue is _____ .
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In the case of Deferred Revenue, what does the revenue recognition principle state?
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What financial entries are recorded when a tenant pays $24,000 for two years' rent upfront?
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Match the following terms with their definitions:
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How much revenue was recognized if an airline company had a beginning balance of unearned revenue of $300,000, collected $760,000, and had an ending balance of $410,000?
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Study Notes
Deferred Revenue Overview
- Deferred revenue is a liability arising when cash is received before the delivery of goods or services.
- Recognition of deferred revenue occurs when the service is performed or goods are delivered, leading to a decrease in the liability.
Key Terminology
- Deferred Revenue, Unearned Revenue, Revenue Received in Advance are interchangeable terms for liabilities from cash received but not yet earned.
- Adjusting entries often clarify the amount of revenue recognized in financial statements and the amount of unearned revenue.
Revenue Recognition Principle
- Revenue is recognized under the condition it is earned and realizable.
- Deferred revenue indicates that cash collection happens before the earnings process is completed.
Common Industries Utilizing Deferred Revenue
- Real estate management, publishing (magazines), and airlines commonly account for deferred revenue due to advance payments collected.
Accounting Treatment of Deferred Revenue
- Upon receipt of cash, a liability is recorded; as goods or services are delivered, the liability reduces and revenue is recognized.
- Revenue can sometimes be recognized based on the percentage of the contract fulfilled rather than full completion.
Practical Examples
- Duration Magazine Inc. collects subscription payments in advance, leading to deferred revenue which is adjusted as magazines are delivered.
- For a two-year rental payment, the management firm records unearned rent initially and then recognizes revenue each month proportionally until the deferred revenue is reduced.
Example Calculation - Airline Company
- Beginning unearned revenue of $300,000 and an ending balance of $410,000 indicates cash collected and revenue recognized need to be examined.
- Cash collected in the year is $760,000; following the equation of beginning balance + increase - decrease = ending balance, it is calculated that $650,000 of revenue was recognized.
Conclusion on Revenue Reporting
- Firms may recognize cash as revenue upon receipt in specific cases, but adherence to proper accounting standards ensures liabilities are accurately represented in financial reports.
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Description
Explore the key concepts of deferred revenue with this set of flashcards. Each card presents a definition and context for understanding this important accounting principle. Perfect for students looking to master the basics of revenue recognition.
