Deferred Revenue and Accrued Expense

Deferred Revenue

Deferred revenue is defined as the advance payments that any company receives for their products or services which will get delivered or performed in the near future. It is also known as unearned revenue. It includes that portion of the revenue of a company that has not been earned yet, but the customers have already made the prepayment for the same. Deferred revenue is an extremely regular practice among the companies that are selling subscription-based products or services which require payments in advance. Some of the examples of unearned revenue are advance payments for newspaper subscriptions, rent payments made beforehand, annual prepayment for using software packages and prepaid insurance. The prepayment is also recognised as a liability in the balance sheet of a company in the form of deferred revenue. As soon as the product or service is delivered or performed, then the deferred revenue becomes an earned revenue, and it moves from a company’s balance sheet to their income statement.

Accrued Expense

Accrued expenses are defined as the expenses which are recognised in the books of accounts before they are actually paid. They are the expenses that a company has incurred but not yet paid to the service provider. Under the principles of accrual accounting, any revenue can only be recognised as earned in a particular accounting period when all the goods and services get performed or delivered. If the goods or services of a company are not performed or delivered but the customer has made their payment in advance, that revenue generated from the purchase will be recorded as a revenue item in the period when the good or service gets performed or delivered.

Under the principles of expense recognition within accrual accounting, these expenses get recorded in the accounting period when they were incurred and not paid. If any company incurs this expense in a particular accounting period but will not make the payment until the next accounting period, the expense gets recorded as a liability in the balance sheet of the company as an accrued expense. When the expense is finally paid, it gets reduced from the accrued expense account in the balance sheet apart from reducing the total cash account in the balance sheet by the same amount.

Difference between Deferred Revenue and Accrued Expense

There are major points of difference between deferred revenue and accrued expense which we should focus on to get a deeper understanding of these two concepts:

Deferred Revenue

Accrued Expense

Definition

Deferred revenue is defined as the advance payments that any company receives for their products or services which will get delivered or performed in the near future.

Accrued expenses are defined as the expenses which are recognised in the books of accounts before they are actually paid.

Treatment in the Balance Sheet

The prepayment is also recognised as a liability in the balance sheet of a company in the form of deferred revenue. As soon as the product or service is delivered or performed, then the deferred revenue becomes an earned revenue, and it moves from a company’s balance sheet to their income statement.

If any company incurs this expense in a particular accounting period but will not make the payment until the next accounting period, the expense gets recorded as a liability in the balance sheet of the company as an accrued expense. When the expense is finally paid, it gets reduced from the accrued expense account in the balance sheet apart from reducing the total cash account in the balance sheet by the same amount.

Conclusion

There are a number of points of difference between deferred revenue and accrued expense. But both of them perform a very crucial role for any organisation. It allows them to manage their finances adequately. It also helps to record these revenue and expense items in the books of accounts in an accurate and timely manner.

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