Since deferred revenue is an amount a company has received but has not done anything yet to earn it. Since it represents something the company owes someone or another company, the deferred revenue is actually a liability. Compare it to owing money on an invoice. If you were entering an unpaid invoice into the ledger, would you put it into the assets? Of course not…it would be a liability since it’s something owed.
Well, the same goes for deferred revenue. It’s something you owe…a service that’s paid for by the customer but you haven’t performed the service. A product a customer has prepaid but which your company has not yet delivered to that customer. Into the liability column it goes. It’s an Unearned Revenue, to be exact.
Now that you know how to enter deferred revenue, here’s what to do with it next, once it’s not a liability any more. When the Unearned Revenue becomes an earned revenue, you make an adjustment in the books. OK, let’s say your company finally delivers that product or performs that service that’s already paid for. Now’s the time to make an adjustment entry.
You will debit the Unearned Revenue (or sometimes it’s called the Deferred Revenue section) section and then make a credit in the Sales or Service Revenue section.
