Non-Profit: Deferred Revenue vs Temporarily Restricted Revenue
If you’re working in the accounting field, it’s important to understand the difference between deferred revenue and temporarily restricted revenue. While both refer to funds that have been received by an organization but have not yet been earned, there are some key differences between the two.
First, let’s define restricted contributions and exchange transactions. A contribution received by a not-for-profit organization is a voluntary, unconditional promise to give, and should be recognized at the time of receipt. These contributions can be classified as unrestricted, temporarily restricted, or permanently restricted, depending on any donor-imposed restrictions. If a donor imposes time and purpose restrictions on a contribution, it will be classified as temporarily restricted until the recipient organization satisfies those restrictions.
On the other hand, exchange transactions are reciprocal transfers between entities that result in the recipient obtaining assets or services in exchange for other assets or services, or liabilities of approximately equal value. Examples of exchange transactions include membership benefits, educational services, and medical services. If a not-for-profit organization receives funds in advance for an exchange transaction, it should record the funds as deferred revenue until the exchange transaction takes place.
It’s important for not-for-profit organizations to carefully consider whether the funds they receive are a contribution or an exchange transaction, as this will determine whether they should be recorded as deferred revenue or temporarily restricted revenue. By consistently making this distinction, organizations can ensure that their financial statements accurately reflect their financial position.
Deferred revenue and temporarily restricted revenue are similar in that they both represent funds that have been received by an organization but have not yet been earned. However, there is an important distinction between the two.
Deferred revenue refers to funds that have been received in advance of the performance of a service or delivery of a product. For example, if a customer pays for a subscription to a magazine in advance, the subscription fees would be recognized as deferred revenue until the magazine is delivered.
Temporarily restricted revenue, on the other hand, refers to funds that have been received by an organization with a donor-imposed condition that limits the use of the funds, but does not affect the donor’s intention to make a contribution. For example, a donor may make a contribution to a not-for-profit organization with the condition that the funds be used to fund a specific program. The organization would recognize the contribution as temporarily restricted revenue until the restriction is satisfied and the funds can be used for their intended purpose.
In summary, deferred revenue represents funds received in advance of the performance of a service or delivery of a product, while temporarily restricted revenue represents funds received with a donor-imposed condition that limits the use of the funds.
Here is an example of a temporary restricted contribution that was pledged on June 1, 2022 and received on December 15, 2022:
On June 1, 2022, a donor pledges a contribution of $50,000 to a university with the condition that the funds be used to fund a scholarship program for students in a specific major. The scholarship program will be implemented in 2023.
The journal entry to record the pledge on June 1, 2022 would be:
Debit: Contributions Receivable (asset) $50,000
Credit: Net Assets with Donor Restrictions (equity) $50,000
On December 15, 2022, the university receives the cash contribution of $50,000.
The journal entry to record the receipt of the cash contribution on December 15, 2022 would be:
Debit: Cash (asset) $50,000
Credit: Contributions Receivable (asset) $50,000
On January 1, 2023, the university incurs expenses of $50,000 to administer the scholarship program.
The journal entry to record the expenditure of the funds would be:
Debit: Scholarships (expense) $50,000
Credit: Cash (asset) $50,000
Journal entry to recognize the revenue and clear out the liability:
Debit: Net Assets with Donor Restrictions (equity) $50,000
Credit: Net Assets Released from Restriction (revenue) $50,000
In this example, the donor’s contribution was temporarily restricted until the scholarship program was implemented and the restriction was satisfied. The university recognized the $50,000 as revenue when the scholarship program was implemented and cleared out the liability by crediting “Net Assets Released from Restriction”.
There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following:
- Pension or IRA distributions
- Significant change in income or deductions.
- Notice from IRS or other revenue department.
- Job change.
- Divorce or separation.
- Attainment of age 59½ or 72.
- Charitable contributions of property in excess of $5,000
- Sale or purchase of a business.
- Sale or purchase of a residence or other real estate.
This blog post contains general information for taxpayers and should not be relied upon as the only source of authority.
Please seek professional tax advice (like reaching out to us) for more information concerning your specific scenario.
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