If you’re a small business owner, you know that keeping track of your finances is crucial to your success. But with so many different concepts and terms to keep straight, it’s easy to get overwhelmed. Two terms that often confuse are deferred Revenue vs accounts receivable.” What’s the difference between these two important financial concepts? This article will compare deferred Revenue vs accounts receivable and show how each concept affects the balance sheet.
The income from products and services that have been sold or delivered but for which no payment has been received is called accounts receivable. An account receivable (also known as AR) is a balance sheet asset that’s credited when Revenue is earned but not yet received.
When a business receives money, it debits its AR balance and credits the cash balance. Small businesses, in particular, need to be vigilant about their accounts receivables, as high balances could indicate or lead to insolvency due to low cash inflow.
The liabilities section of the balance sheets contains deferred Revenue. Deferred Revenue is cash receipts related to goods and services that have yet to be delivered or rendered. Deferred Revenue includes proceeds from gift certificates or magazine subscriptions, where products are delivered to the payer later.
When a company delivers a product or renders a service, it recognizes the earnings by debiting the deferred revenue balance and crediting the cash balance with the appropriate amount. Small businesses with deferred revenues should be aware of their balances. A high revenue balance could indicate inefficiency when delivering goods or services.
Deferred Revenue vs Accounts Receivable: Relationship
There is no direct relationship between Accounts Receivable and Deferred Revenue, but a decrease in one results in a proportionate increase in the other. Both reflect a business’ (or individual) pursuance of goods and services on a per-deliver (Accounts receivable) or pre-paid (Deferred Revenue) basis.
This explains why businesses with both on their balance sheet tend to generate more revenues than those that only have one of them. Small businesses that follow an Accrual Accounting model may consider integrating both into their accounting system.
Although a reduction in either account receivable or deferred Revenue will result in an equal increase in the cash account, there is no causal relationship between the two.
Receivables and revenues refer to the amount of money customers owe a business.
This is fantastic news for companies that manage both accounts receivable and accounts payable because they have the opportunity to earn more income than those who only track one account or the other.
If you’re a small business owner who uses accrual accounting, you may be wondering if expanding your business by integrating both accounts is possible.
Although an increase matches the reduction in one account in the others, there is no direct link between Accounts Receivable and Deferred Revenue.
Receivables Revenue is the term for the amount of money a business owes from its customers.
This is great news because it means that companies that own both accounts receivable and accounts payable on their balance sheet can generate more revenue than those that don’t.
Integrating both cash accounting and accrual accounting for small businesses could lead to an increase in revenues.
Deferred Revenue is income that has been received but has not yet been earned by the business. This occurs when customers pay for products or services before they are delivered. Once the work is done, the receivable is converted into cash. The money received is counted as Revenue and an asset but is not yet counted as profit.
Accounts receivable requirements are the guidelines businesses must follow when recording and reporting receivables. An annual accrual accounting method is used for revenue and expenses that have been incurred but not yet received or paid. This allows businesses to reflect their financial position more accurately at the end of the year.
A company recording an adjusted entry is to ensure that its financial statements are accurate and up-to-date. Cash basis profit and loss is a measure of a company’s financial performance over a period of time, typically on a quarterly or annual basis.
How To Debit and Credit Your Deferred Revenue
A software company received a $48,000 payment for maintenance on January 1, 2017.
On January 1, when customers pay their bills, $48,000 will be deposited into the company’s bank account. The company will then deduct $48,000 from the amount they owe their customers and add it to their Deferred Revenue account.
Each month, as services are rendered, the service provider will record Revenue from these services and deduct the amount from the total receivable. This will continue each month until the entire receivable amount has been earned.
On February 1, 2018, the business should recognize the $4,000 as a revenue credit and a $4,000 deferred income. This will show that the company has performed services and that $4,000 in profit has been earned.
The amount of cash in the company’s account will remain the same.
This picture illustrates how this process plays out every year:
A common mistake
Many business owners make the mistake of offsetting their Deferred Revenue with Accounts Receivable.
Companies may choose to show potential income on a contract by recording the contracted amount in accounts receivable and deferred revenues. This can be useful for showing investors the earning potential of the company.
This is not in compliance with generally accepted accounting principles. Deferred revenues should not be recorded as an asset alongside receivables.
When an investor evaluates a business, they will consider any contracts with customers that the business has. Banks, however, are less likely to do so.
As businesses grow, owners need to become more familiar with these concepts to make sound financial decisions.
Deferred revenue vs accounts receivable are both important financial concepts. They represent different stages in the process of earning income. Deferred Revenue is money that has been received but not yet earned, while accounts receivable is money that has already been earned but not yet collected. Keep these terms straight in your mind, and you’ll be on your way to better tracking your business finances!