Journal Entries for Revenue and Unearned Revenue in 2013

1. Journal entries for Revenue and Unearned Revenue in 2013

Debit Credit

Dr Accounts receivables / Cash 44,253

Cr Unearned revenue 44,253

Dr Recognition of unearned revenue 41,921

Cr Revenue 41,921

Dr Accounts receivables / Cash 35,928

Cr Revenue 35,928

2. T - Account for Unearned Revenue

Description Debit Credit

Opening balance (30 June 2012) 20,059

Deferral of unearned revenue 44,253

Recognition of unearned revenue 41,921

Closing balance (30 June 2013) 22,391

3. As any other company, Microsoft has the incentives to "manage" its earnings. In general, these incentives may include, among others:

- "smoothing" revenue volatility (seasonality, effects of new products inception etc.);

- building provisions for risk-related transactions (bad debts related to goods delivered and services provided, unfulfillment of the company's obligations for the signed contracts, production defects, etc.);

- tax shields / tax optimisation.

Revenue recognition is particularly important for Microsoft's earnings, because in the software industry almost every dollar of recognized revenue goes directly to earnings. Microsoft has had very significant net income margins over last three years ranging from 23 to 33%. This could create some specific incentives to Microsoft to " manage" its earnings:

- to create "hidden reserves" for the future when business could decline,

- to avoid an earnings shortfall relative to security analysts' forecasts,

- decreasing the volatility of revenue and earnings,

- moreover, certain subjective accounting decision are also required by the existing accounting principles. As explained in the case, a part of the services paid is still not rendered, so is can