Definition of Deferred and Unearned Revenues
A deferred item, in accrual accounting, is any account where a revenue or expense, recorded as an liability or asset, is not realized until a future date (accounting period) or until a transaction is completed. Examples of deferred items include annuities, charges, taxes, income, etc. If the deferred item relates to an expense (cash has been paid out), it is carried as an asset on the balance sheet. If the deferred item relates to revenue (cash has been received), it is carried as a liability. A deferred revenue is specifically recognized when cash is received upfront for a product before delivery or for a service before rendering. In these cases, the earnings process is not complete when the cash is received, so the cash is recorded as a liability for the products or services that are due to the buyer .
Receipts for magazine subscriptions are a type of deferred revenue.
A deferred revenue item involves cash received before the earnings process is complete.
Accounting for Deferred and Unearned Revenues
An example of a deferred revenue is the monies received for a 12-month magazine subscription. The proceeds on the subscription relate to a future benefit (magazine) for the buyer that he will receive over the course of 12 months. Since the seller has received full payment for all 12 issues that will be delivered over the course of the year, the payment is recorded as unearned or deferred revenue in the current liability section of the balance sheet. If cash received is for benefits that extend past the current accounting period, a long-term liability would be recorded instead. As each magazine is delivered to the buyer (earnings process is now complete), the applicable "earned" portion of the original payment is transferred from the liability account to subscription revenue, which is disclosed on the income statement.