Is Deferred Revenue a Current Liability?


Quick Answer

Deferred revenue is a current liability because the revenue is not yet earned even though products or services are due to a customer, according to Investopedia. Examples of deferred revenue are software license fees, maintenance fees and subscriptions owed to software companies on a monthly or yearly basis.

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Full Answer

Software companies allow users to download software to their computers for a certain time after an initial payment or free trial. The firm may then list upcoming subscription renewals as deferred revenue because the fees have not yet been paid, even though users have the software on their computer. Another example of deferred revenue is when a company receives a $100,000 advance payment for products, and the products take six months to make and deliver. The firm does not move the $100,000 payment to the income portion of a balance sheet until the products are finished and transferred to the customer, notes Investopedia.

Within the accounting records of a company, a master liability account may be set up for spreadsheets and computer documents to track a company's unearned income, according to Accounting Coach. When the unearned income becomes earned, the accounting software adjusts the company's books and changes the debit to a credit. The accounting entry then shifts to the company's sales revenue or service revenue account.

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