Why is deferred revenue classified as a liability?

Why is deferred revenue classified as a liability?

• A. It is a future revenue source
• B. It is an estimate of future sales
• C. It is a prepayment for goods or services not yet delivered
• D. It is a tax obligation to be paid

Answer: (C)

Deferred revenue is classified as a liability because it represents a prepayment made by a customer for goods or services that have not yet been delivered or fulfilled. When a company receives payment in advance of providing the service or good, it results in an obligation to perform in the future, which is why it is recorded as a liability on the balance sheet. When the company eventually delivers the product or service, the deferred revenue is recognized as actual revenue, indicating that the company has fulfilled its obligation. Hence, until the service is rendered or the goods are provided, the company holds a liability in the form of deferred revenue, as it still owes this fulfillment to the customer. This is a fundamental concept in accrual accounting, where revenue is recognized when earned, not necessarily when cash is received.

Deferred revenue is classified as a liability because it represents a prepayment made by a customer for goods or services that have not yet been delivered or fulfilled. When a company receives payment in advance of providing the service or good, it results in an obligation to perform in the future, which is why it is recorded as a liability on the balance sheet.

When the company eventually delivers the product or service, the deferred revenue is recognized as actual revenue, indicating that the company has fulfilled its obligation. Hence, until the service is rendered or the goods are provided, the company holds a liability in the form of deferred revenue, as it still owes this fulfillment to the customer. This is a fundamental concept in accrual accounting, where revenue is recognized when earned, not necessarily when cash is received.