Question

Phone companies bill their customers after they provided them with cellular service. So if a customer receives their October phone usage during the month of November. From the phone company's perspective, they make an adjusting entry at the end of October if they want the revenue they earned at the end of the month shows up on the October income statement. From the company's perspective would this adjusting entry be an example of accrual or a deferral, why?

Answer 1

So basically there are two concepts regarding this from accounting perspective:

1. Deferred Revenue: When money is received in advance, and the concerned goods or service have not yet been provided. In this scenario, cash is received, but is recognized as income in the income statement in the period in which the goods and services are provided. Any advance payment received would come under this category.

2. Unbilled Revenue: The revenues that have been earned by the company but the payment has not yet been received for the same. Income from post paid bills would come under this category, as the services have already been provided (in the month of October) but the payment will be received later (in the month of November)

Thus, from the above concepts, we can say that the income of post paid bills is considered as an Unbilled revenue for the phone companies i.e. it is an accrual, not a deferral.