Deferred Revenue question

NickyW

Hi there - its me again!! Can anyone help me? At my work at the end of each year a journal entry is made for deferred revenue. Whilst I understand deferred revenue I don't understand what has been done historically at my company.
The deferred revenue is calculated - then a journal is done to credit the Deferred Revenue Account(I get!) and the Pre-paid Revenue Expense Account is debited. Then journals are done on a monthly basis debiting the Deferred Revenue Account and crediting the pre-paid revenue Expense Account.
What I don't understand is this pre-paid revenue expense account - would I expect to see it on the P & L.
Any replies would be greatly appreciated (as always!)
Regards
Nicky

crispy

Hi,

At where I work we have some deferred income for rental charged (floor space in our warehouse) in advance. Eg. In December (Year End) we have invoiced our customer for £ 3,000 covering Dec through to Feb. At 31/12 we will have some deferred income for Jan and Feb so would enter the following journal:

Dr Rent Received (Income Statement)2,000
Cr Deferred Income (Balance Sheet) 2,000

At 31/1 the provision would then be reduced:

Dr Deferred Income (Balance Sheet) 1,000
Cr Rent Received (Income Statement) 1,000

Rental income of £ 1,000 per month is correctly reported.

PGM

I agree with the above post.

If you're not recognising income it has to be moved from the P&L to the balance sheet, where it will be shown as a current asset in the month end accounts.

NickyW

Thanks for your replies. I think I get it now -but isn't it shown as a liability on the balance sheet!!??
Regards
Nicky

Andy Blyth

Hi,

Yes it is shown as a creditor on the balance sheet. You told us that in your first post ("credit the Deferred Revenue Account").

I think where you are getting confused is that your company, for whatever reason, seem to post the debit to an expense account in the P&L, rather than debiting the sales account, which is what I would usually expect to see.

The effect is exactly the same (a debit to the P&L), it's just a strange way of showing it.

Hope that clarifies it for you.

Andy

NickyW

I understand now!! Thanks!