Auxiliary Standard Operating Procedures


SUBJECT:

Deferred Revenue

SOURCE:

Auxiliary Accounting, Financial Management Services

DATE ISSUED:

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.

ASOP:

Initial receipt of cash is generally recorded in one of two manners—as a Debit to Cash and a Credit to Revenue, or a Debit to Cash and a Credit to Deferred Income as indicated below.

 

CR

Transaction to

record initial cash

receipt

Object Code

Object Code Name

Debit

Credit

8000

Cash

$2,440

 

1xxx/94xx

Revenue/Deferred Revenue

 

$2,440

 

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:

 

Period 01

AVAD Entry –

Deferral of entire

amount received in

July – not yet earned

Object Code

Object Code Name

Debit

Credit

1xxx

Revenue

$2,440

 

94xx

Deferred Revenue

 

$2,440

 

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

AVAD Entry –

Recognition of earned

revenue for August

Object Code

Object Code Name

Debit

Credit

94xx

Deferred Revenue

$220

 

1xxx

Revenue

 

$220

 

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:

 

Month in which revenue was recognized

Amount

August

$   220

September

600

October

620

November

600

December

400

Total

$2,440

 

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

AVAD Entry –

Recognition of earned

revenue for August

Object Code

Object Code Name

Debit

Credit

94xx

Deferred Revenue

$220

 

1xxx

Revenue

 

$220

 

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

DEFINITIONS:

Deferred Revenue – Revenue received but not yet earned (i.e., goods or services have not yet been provided).

RESPONSIBLE

ORGANIZATION:

 

Auxiliary Organizations with deferred revenue