I have searched but cannot find a good answer for how recording of deferred revenue affects the financial statements as well as the impact when the revenue is earned.
My thought is that deferred revenue is listed as a short term liability and an increase in cash on the balance sheet. Once it is recognized it is listed as a revenue on income statement and also is listed as an equity.
I know that answer is wrong or at least not complete. Please help if you can.
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Some deferred revenue is long term in nature. In the example of an insurance or warranty company, some deferred revenue may stretch out a few years. Obviously, as the longer duration liabilities become current they will be moved to current liabilities.
As to the impacts on retained earnings and equity, that is dependent on your cost structure. Without more information, I wouldn't dare assume the impact on book value of equity.
Here's an example:
Let's say you're a small company that owns a bunch of office space. You lease a unit to Joe Blow for 5 years, $12k per year. Joe pays you $60k up front [never happens, but illustrates the process]
day1 [only impacts the balance sheet] Cash $60,000 [debit asset - increase it] Unearned Revenue - Short Term $12,000 [credit liability - increase it] Unearned Revenue - Long Term $48,000 [credit liability - increase it]
recurring entries [maybe monthy? - impacts balance sheet and income statement] Unearned Revenue - Short Term $1,000 [debit liability - decrease it] Revenue $1,000 [credit revenue - increase it]
You can't really jump to any conclusions about what this does to equity. You'd probably also have a recurring entry there to shift $1k from long term to short term, so short term is always $12k until the final year.
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