Explain the difference between deferred revenue and accounts receivable. How does revenue recognition and the matching principle impact the calculation of deferred revenue?

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Bryan

Business

2 June, 19:38

Explain the difference between deferred revenue and accounts receivable. How does revenue recognition and the matching principle impact the calculation of deferred revenue?

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Kareem Brennan · Answer 1

Deferred revenue is the portion of a company's revenue that has not been earned, but cash has been collected from customers in the form of a prepayment.

Accounts receivable are amounts of money owed by customers to another entity for goods or services delivered or used on credit but not yet paid for by clients.

The core principle of ASC 606 is that revenue is recognized when the delivery of promised goods and/or services matches the amount of consideration expected in exchange for the goods and/or services.

In this sense, revenue recognition and the matching principle can impact the calculation of deferred revenue since we don't know if the delivery of promised goods and/or services can meet the expectation of the firm.

Explanation:

Deferred revenue is the portion of a company's revenue that has not been earned, but cash has been collected from customers in the form of prepayment. However, Accounts Receivable represents the income from products or services that have been sold and delivered.