SUBJECT:

Deferred Revenue

SOURCE:

Auxiliary Accounting, FMS

January, 2008

ASOP NO:

18.0

RATIONALE:

When an organization receives revenue for which the goods or services have not yet been provided, it is required to defer recognition of the income until such time as the goods or services have actually been provided to the customer. This document provides guidelines for deferment of revenue for auxiliary and service accounts.

However, it is required to defer recognition of revenue until it is earned. For example, if a student pays $2,440 in July to cover housing costs for the first semester, the student housing organization would not recognize the entire $2,440 as July revenue since it was not earned in that month. It is required to recognize the appropriate revenue amount for each month as it is earned and defer the remaining dollars until the month for which the housing is provided.

(Note: the following examples assume that housing for the semester runs from August 20th to December 20th—a total of 122 days.)

A. When the initial cash receipt is booked as Revenue -

Since the revenue for August through December has been received but none of it was earned in July, the unit will complete the following AVAD entry in August to defer the entire amount as follows:

From this point forward, an entry is made each month to recognize the income earned for the month and reduce the balance in deferred revenue as follows:

Period 02 Amount Calculation = (11/122 days) * $2,440 = $220

Period 03 AVAD Entry – Recognition of earned revenue for September	Object Code	Object Code Name	Debit	Credit
	94xx	Deferred Revenue	$600
	1xxx	Revenue		$600

Period 04 AVAD Entry – Recognition of earned revenue for October	Object Code	Object Code Name	Debit	Credit
	94xx	Deferred Revenue	$620
	1xxx	Revenue		$620

Period 05 AVAD Entry – Recognition of earned revenue for November	Object Code	Object Code Name	Debit	Credit
	94xx	Deferred Revenue	$600
	1xxx	Revenue		$600

Period 06 AVAD Entry – Recognition of earned revenue for December	Object Code	Object Code Name	Debit	Credit
	94xx	Deferred Revenue	$400
	1xxx	Revenue		$400

Once the period 06 entry is booked, the entire $2,440 initially received in July will have been recognized as revenue as illustrated below:

B. When the initial cash receipt is booked as Deferred Revenue -

If the initial cash receipt is booked as deferred revenue, the unit will make the AVAD entries previously outlined for periods 02 through 06. There is no need for the period 01 entry since the entire amount is already recorded as deferred revenue. The unit need only recognize the appropriate monthly revenue and reduction of deferred revenue.

Period 02 Amount Calculation = (11/122 days) * $2,440 = $220

DEFINITIONS: