Deferred Revenue - Accounting Question

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wouldn't you just hit unearned rev when they paid for it then pull it out of there to rev as they take it?

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That is what I'm thinking. This example above is for one of our Joint Ventures.

On our side, if we receive a prepayment of say $3,000,000.00, we apply it to AR which leaves a negative receivable balance on the system. Then as they take it, we then record the revenue and COGS. Just not sure if we are doing it right on our side.

Well there the first part of the entry would be:

DR cash $6,000,000
CR revenue $6,000,000
DR cogs $5,750,000 (or whatever the system recognizes cogs as)
CR iventory $5,750,000

Since the sale isn't earned/realized I have to move it to unearned revenue with a JE.

DR Cash
CR Unearned Revenue
You haven't delivered any product, so under accrual rules you haven't completed the sale in order to recognize any revenue.

DR Inventory
CR Cash
Entry to record acquisition of inventory for delivery to customer.

DR COGS
DR Unearned Revenue
CR Inventory
CR Sales Revenue
Entry to record delivery of fuel to customer and complete sale.

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DR Cash
CR Unearned Revenue
You haven't delivered any product, so under accrual rules you haven't completed the sale in order to recognize any revenue.

DR Inventory
CR Cash
Entry to record acquisition of inventory for delivery to customer.

DR COGS
DR Unearned Revenue
CR Inventory
CR Sales Revenue
Entry to record delivery of fuel to customer and complete sale.

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This is what I just came up with. Now getting our AR department to do this correctly will be a challenge. All these invoices are keyed into the system and coded out by the AR department. Think thousands of invoices a month done and not many (less than 5%) done this way.

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(CR) Deferred revenue $6,000,000
(DR) Product revenue $6,000,000

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How come revenue is being debited here?

Edit: nevermind just saw this was a later entry

The OP said it was a joint venture affiliate who recorded the sale, and he was going to remote in to fix the accounting. He also used a $6 million sale to a single customer. I figured we are not talking about a mom & pop operation, but one that likely has financing arrangements with institutions who require audited financial statements.

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While true, companies that aren't already set up to handle this sort of thing routinely aren't big enough to get audited.

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Heck there are several hundred US 'public' companies where all that is being audited after year one is the audit fee itself.

There are thousands of shell/development microcaps out there with exactly one employee and that guy rarely knows accounting I can promise you

I am not an accountant, but I do work in finance. As such, I'm responding more out of my own curiosity than anything else. I'll also answer as if you were a public company.

If the product is to be delivered down the road, the revenue should be deferred in accordance with most public company revenue recognition rules under U.S. GAAP.

As such, you'd record an immediate cash entry and an immediate deferred revenue liability. If you are financing the inventory required to deliver the product, you'd also record an increase in inventory and an offsetting increase in liabilities.

As the product is delivered, you'd recognize revenue from the deferred account consistent with the timing of product delivery. This would be an accrual entry to your revenue account, but you'd obviously receive no further cash. Under the matching principal, you'd time the realization of COGS to coincide with revenue recognition.

Deferred revenue is essentially cash received where performance has yet to be completed. Accounts receivable are incurred when performance has been completed, but cash has yet to be received. Cash revenue is equal to reported revenue less any increase in accounts receivable less any decrease in deferred revenue. Finally, if this were a service as opposed to a product, the deferred revenue would be recognized ratably over the life of the service contract.

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On our side, if we receive a prepayment of say $3,000,000.00, we apply it to AR which leaves a negative receivable balance on the system.

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As Poodlebrain mentioned, the reason you had a negative balance is because you recorded two assets (cash and AR). Accounts receivable shouldn't have been recorded because you did in fact receive the cash. Instead, you'd record the deferred revenue, thereby providing you with your offsetting liability (remember, despite the name, deferred revenue is actually a liability - it's essentially a loan - if you don't perform, you don't keep the cash you received).