Define Deferred Revenue. Why is it a liability.
A deferred revenue (usually called unearned revenue or revenue collected in advance) is a revenue that has been collected in advance of being earned and recorded in the accounts by the entity. Because the amount already has been collected and the goods or services have not been provided, there is a liability to provide goods or services to the party who made the payment in advance. A typical example is the collection of rent on December 15 for one full month to January 15 when the accounting period ends on December 31. At the date of the collection of the rent the following entry usually is made:
December 15:
Cash (+A) 4,000
Rent revenue (+R, +SE) 4,000
On the last day of the period, the following adjusting entry should be made to recognize the deferred revenue as a liability:
December 31:
Rent revenue (-R, -SE) 2,000
Deferred rent revenue (or Rent revenue collected in
advance) (+L)
2,000
The deferred rent revenue (credit) is reported as a liability on the balance sheet because two weeks' occupancy is owed in the next period for which the lessee already has made payment.
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