On July 1, 2013, when the memberships were sold, the Cash account (an asset) should be debited to
show the amount received ($2,100) and, since the revenue has not been earned and Bikram Yoga Natick
is obligated to provide the yoga classes, the Deferred Revenue account (a liability) should be increased
(credited) by the amount of funds received ($2,100).
On July 31, 2013, Bikram Yoga Natick has earned one month's worth of the revenue and reduced their
obligation by the same amount so they should reduce (debit) the Deferred Revenue account (a liability)
for $700 and increase (credit) the Revenue account (part of owners' equity) for $700, one-third of the
Similar to Deferred Revenue, the Prepaid Expense account can be confusing at first glance. Even though
it has the word ‘expense’ as part of its account name, it is not an expense account. Prepaid Expense is an
asset account. It represents an amount that has been prepaid by the business, and thus the business
now has the right to receive goods or services in the future. Prepaid expense will be converted into an
expense at a later date, when the goods or services are provided. This, again, is an example of accrual
accounting and the matching principle.