Deferred revenue is revenue that is initially considered a liability but eventually becomes an asset. It is an item that is initially recorded as such and then over time or through the course of normal business operations it becomes an asset. Deferred revenue is sometimes referred to as unearned revenue. When referred to in this manner as unearned revenue it may be easier for some to be able to understand why it is initially a liability but is later turned into an asset.
It may also be helpful to determine what exactly a liability is and what an asset is before you are able to truly identify what deferred revenue is. Take cash, for example. Cash is and will always be an asset. It is never a liability. It is not an expense and can never be regarded as anything but an asset. Cash is also a current asset and it will increase a person’s net worth that is in possession of it. However, when cash is yet to be earned or is unearned through a service not yet having been performed or a product not delivered then this unearned cash has to be treated as a liability.
Another example of this would be unearned rental income. If you are a landlord and you currently have a tenant then you are responsible to provide him or her a space to rent. If your renter paid a year in advance and you failed to provide a space to rent within that year term then you would have to return your renter money. Your deferred revenue will be earned income at the end of the year.
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