Recording Deferred Revenue and Recognizing It Monthly

Deferred revenue is an amount you collect from a client before performing the service — like an annual subscription, a maintenance contract, or an advance payment for an extended service. When collected, it’s a liability owed by you, not revenue you’ve earned, and it only becomes revenue to the extent you actually deliver each month. That’s why it’s recorded in two stages: collecting the full amount into a liability account, then a monthly journal entry that transfers the earned portion into revenue.

Preparing the Accounts Before You Start

You need two accounts in the chart of accounts:

• Deferred Revenue: an account under Liabilities, holding the collected amount not yet earned.
• Revenue Account: under Revenue, to which the earned portion is transferred month after month.

Step One: Recording the Collection

You have two ways to record the collection, with the same accounting result:

• Via a receipt: record a receipt for the amount and select the Deferred Revenue account through the sub-account field, and the system generates its journal entry automatically. This approach suits you better if you track your receipts and treasury balances from their own screens.
• Via a journal entry: or record the collection as a manual journal entry directly, as shown in the table below.

Account	Debit	Credit
Treasury / Bank	1,200
Deferred Revenue		1,200

In both cases, no revenue appears in the income statement yet, and the full amount appears as a liability on the balance sheet.

Step Two: Recording the Monthly Recognition Entry

Recognition movements are recorded as journal entries at the end of each month, for the value earned that month:

1. Go to the Journal Entries screen and click add entry.
2. Debit the Deferred Revenue account for the recognized value.
3. Credit the Revenue Account for the same value.
4. Write in the description what clarifies the period, such as “January revenue recognition – Contract #4840,” then save the entry.

Account	Debit	Credit
Deferred Revenue	100
Service Revenue		100

This entry repeats every month until the deferred revenue account’s balance reaches zero.

If the Recognized Value Differs from Month to Month

The values don’t have to be equal, and the amount doesn’t have to be divided by the number of months. The rule is to recognize what was actually delivered each month, with the journal entry reflecting its real value rather than a calculated average. So if the collected amount is 1,200 SAR, and 100 was earned in the first month and 97 in the second:

Month	Recognition Entry Value	Deferred Revenue Balance After
First	100	1,100
Second	97	1,003
Third	103	900

The only rule is that the sum of everything recognized over the entire period equals exactly the amount collected, so the deferred revenue balance reaches zero when the contract ends.

To determine each month’s value, tie it to a tangible measure instead of estimating: the number of visits performed, the number of activated users, or the completion percentage. If that’s not possible, distribute the amount equally and make the last month a settlement month that absorbs the rounding difference and zeroes out the balance.

Tracking the Remaining Balance

Open the General Ledger report and select the deferred revenue account and specify the period, to see the collection entry, the monthly recognition entries, and the balance after each movement. This is the report that tells you at any moment how much of the services you haven’t yet delivered remains owed.

Important Notes

If the deferred revenue pertains to a specific project, specify the cost center on the recognition entry so the project’s revenue appears under its correct center when comparing its cost to its revenue.