How to Prepare a Deferred Revenue Schedule

Deferred revenue represents cash received from a customer for products or services that have not yet been delivered. Under the accrual basis of accounting, this payment is not immediately recognized as revenue. Instead, it is recorded as a liability, signifying an obligation to the customer. A deferred revenue schedule is an internal document used to track these advance payments and ensure they are recognized as revenue in the correct accounting period as the service is performed or the product is delivered. This process adheres to the revenue recognition principle, codified under ASC Topic 606, which dictates that revenue should be recorded when it is earned, not when cash is received.

Information Required for the Schedule

To construct a deferred revenue schedule, specific data points must be gathered for each contract. The customer’s name or a unique identification number is needed to track obligations on a per-customer basis. The associated contract or invoice number provides a direct link to the original sales transaction document for auditing and record-keeping.

The total value of the contract represents the full amount of cash received upfront that will be recognized over time. The date of the sale marks the beginning of the obligation, while the service start and end dates define the earning period. This is the timeframe over which the company will deliver the service and recognize the deferred revenue. For example, a $1,200 annual software subscription starting on January 1st has a 12-month earning period.

Creating the Deferred Revenue Schedule

After gathering the necessary information, the deferred revenue schedule can be built within a spreadsheet program. The structure begins with columns for the core data: Customer Name, Contract Number, Total Contract Value, Service Start Date, and Service End Date. These columns organize the data for each contract involving an advance payment.

The next step involves adding calculation columns to track revenue recognition over time. The “Monthly Recognition Amount” is determined using a straight-line method, where the total contract value is divided by the number of months in the service period. For a $12,000 contract over 12 months, the monthly recognition amount would be $1,000, which is the portion of the liability converted into earned revenue each month.

The main body of the schedule consists of columns representing each month (e.g., Jan-25, Feb-25). Within each month, two sub-columns are used: one for “Revenue Recognized” and another for the “Ending Deferred Balance.” For each contract, the monthly recognition amount is entered in the corresponding month’s “Revenue Recognized” column. The “Ending Deferred Balance” is then calculated by subtracting the recognized amount from the previous month’s ending balance, showing the liability decreasing over the life of the contract.

Recording Journal Entries

The deferred revenue schedule informs the required accounting journal entries. When a customer pays in advance, a journal entry is made to record the cash received and establish the liability. This initial entry involves a debit to the Cash account and a credit to the Deferred Revenue account. For instance, if a client pays $6,000 for a six-month service contract, the entry is a $6,000 debit to Cash and a $6,000 credit to Deferred Revenue.

The deferred revenue schedule then guides the creation of periodic adjusting entries. At the end of each accounting period (monthly), an entry is made to recognize the portion of revenue that has been earned. This adjusting entry involves a debit to the Deferred Revenue account, reducing the liability, and a credit to a revenue account, such as Service Revenue. Using the previous example, the schedule would show $1,000 of revenue earned each month ($6,000 / 6 months).

The recurring monthly entry would therefore be a $1,000 debit to Deferred Revenue and a $1,000 credit to Service Revenue. This process is repeated each month for the duration of the contract. By the end of the six-month term, the Deferred Revenue liability account for this contract will have a balance of zero, and the full $6,000 will have been recorded as earned revenue.

Impact on Financial Statements

Properly managing deferred revenue impacts a company’s financial statements. On the balance sheet, deferred revenue is presented as a current liability, reflecting the obligation to provide future services. As cash is received, the liability balance increases, and as the company fulfills its obligations, adjusting journal entries reduce this balance.

This process ensures the balance sheet accurately represents the company’s financial position. Without properly deferring revenue, a company would overstate its equity and understate its liabilities, giving a misleading picture of its financial health. The deferred revenue line item signals to investors and creditors that the company has future obligations tied to cash it has already collected.

On the income statement, the schedule ensures revenue is recognized accurately over the service period. Instead of reporting a large influx of revenue when payment is received, the company reports smaller, consistent amounts each month as the service is delivered. This prevents the overstatement of net income in one period and its understatement in subsequent periods, providing a clearer picture of operational performance.