why is Deferred Revenue classified as a Liability account.

Smith21000

GAAP requires that revenue generally be recognized when (1) it is realized or realizable AND (2) it has been earned. In the case of deferred revenues the company has not earned it yet however has received the cash or some other form of value, therefore we owe someone else a product or performance of service, etc.. Only when the company fulfills it obligation can they recognize it as income.

CaptainForest

EXAMPLE:

Today is December 14, 2006.

I give you (your company) $200 for you to provide me with security for 1 month from Dec. 15 – Jan 15.

Year End Dec. 31

On December 14, when you received the money, what JE do you do? You have received 200 cash (debit), what is the credit? Have you earned any revenue? You haven’t provided me with security since that doesn’t start until Dec. 15. So that money is a Liability to you since you haven’t done anything to earn it.

Therefore, the JE would be:
Dr. Cash 200
Cr. Unearned Revenue Liability 200

On Dec. 31, you have completed HALF of the security. So you have earned HALD of the money I gave you.
The JE would be:
Dr. Unearned Revenue Liability 100
Cr. Revenue 100