Could you please explain why the deferred revenue is treated as LIABILITY as per below:
"Sales made which include revenue for ongoing servicing work must have part of the revenue deferred. The deferred
revenue must include the normal profit margin (25%) for the deferred work. At 30 September 2012, there are two more
years of servicing work, thus $1·6 million ((600 x 2) x 100/75) must be treated as deferred revenue, split equally
between current and non-current liabilities."
ACCA Forums
FRF7 Dec 12 Deferred revenue
Even if the client hasn't paid you, the original invoice to the client would be Dr Receivables and Cr Revenue.
But then along come the auditors and they say "But you haven't earned all this revenue - you still have obligations for two more years" so two years' worth of obligation including the profit element needs to be deferred - half of it for one year and half for two years.
Why is it shown as a liability? That's an F3 question isn't it? It's a credit balance and a credit balance can only be either income or liability and we've just decided that it can't be income....therefore it must be liability
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