Accrual Basis of Accounting

            Airline companies usually always sell all of their tickets in advance, before the flight takes place, but will not receive the revenue from those ticket sales until the actual period of flight. Until the flight takes place, the company that is offering the flight will have to put all of the money from the ticket sales under deferred revenue, because the money from the ticket sales have become a liability. It is a liability because they are obligated to earn the money from the ticket sales. So, once the flight takes place then the company will realize that the sales have been completed, so they can move all the money from the deferred revenue to cash. 

           If you buy furniture from a store in June 2008 that is having a sale that states, “No payments until 2009,” then the store realizes that they earn revenue the moment the furniture is sold. They earn revenue the moment the furniture is sold because; once you take possession of the furniture it becomes yours, even if you haven’t paid it off completely. If you take possession of the furniture without paying it off, then the store will put the amount that you still owe them under accounts receivable, since it is what they will be earning in the future. 

          If you make a magazine subscription, for one year, for fifteen dollars, then the provider of the magazine realizes that each time you receive a magazine they turn their liability, which is the fifteen dollars, that they turned into deferred revenue originally into cash, which is revenue. So, each month you receive a magazine the company would receive $1.25 out of the fifteen dollars, because fifteen divided by twelve equals $1.25.