Other People Are Reading
A deferred revenue represents payments received by the company which it will earn in the future. The company promises to provide a product or service to the customer at a future date. When the company provides the product or service, the money becomes earned revenue for the company.
Deferred revenue represents a product or service the company owes to the customer. Since the company owes this, deferred revenue represents a liability to the company. If the company will provide the product or service within the next 12 months, the deferred revenue represents a current liability. If the company will not provide the product or service within the next 12 months, the deferred revenue is a long-term liability.
The receipt of the customer's payment and the final delivery of the product or service must be recorded in
the company's accounting records. When the company receives the payment from the customer, it records the receipt of the payment and the creation of the deferred revenue. The company debits "Cash" for the amount received and credits "Deferred Revenue." When the company delivers the product or service to the customer, it records a journal entry by debiting "Deferred Revenue" and crediting "Revenue."
The company reports the deferred revenue balance on the balance sheet. If the deferred revenue is a current liability, it appears in the current liability section on the balance sheet. If the deferred revenue is a long-term liability, it appears with the other non-current liabilities on the balance sheet. In both cases, it increases the total liabilities reported by the company. When the company delivers the product or service and recognizes the revenue, it reports the revenue in the revenue section of the income statement.