Deferred revenues on software sales – the accrual concept in action

The accruals concept is one of the fundamental accounting concepts which – more or less – dictates how we do accounting.  I have written about the accruals concept previously. Briefly,  the accruals concept means that revenues and costs need to be matched against each other – when something is paid, or when the cash is received is not relevant.

Here is a great real life example. As you may know, Microsoft released Windows 8 in October 2012. Of course, for Windows 8 to be available on new devices, Microsoft sold it to equipment manufacturers well in advance of this. This means they had incurred the cost of distributing the software to the manufacturers and also received payment.  However, the  cash received is not a sale in accounting terms as the software was not officially released until October 26th, 2012. Or, to put this in accruals concept terms, there could be no matching of costs and revenues until the actual official release date had passed. So, in their quarterly report at the end of September 2012, Microsoft deferred revenues of $783 million. You can read more here.