Wait a minute... Deferred Revenue reflects cash that we've already collected upfront for a product/service we haven't delivered yet. Why is it a Liability?

Wait a minute... Deferred Revenue reflects cash that we've already collected upfront for a product/service we haven't delivered yet. Why is it a Liability?

• A. It increases future cash.
• B. It implies additional future taxes and possibly recognize additional future expenses when we record it as revenue.
• C. It is an asset.
• D. It has no impact on the financials.

Answer: (B)

Deferred revenue sits on the books as a liability because cash has been collected for a product or service that hasn’t yet been delivered. The company has an obligation to provide that product or service in the future, so the amount isn’t revenue yet and isn’t an asset either. As fulfillment occurs, the liability decreases and revenue is recognized in the appropriate period. Thinking about taxes and future expenses helps explain why this is the right explanation. When the revenue is finally recognized, it affects taxable income in that period, and there may be costs tied to delivering the promised product or service in the future. So the liability flag reflects an obligation that will impact future financials, taxes, and costs as the obligation is fulfilled. The other options don’t fit because the cash is already in hand (not increasing future cash), it isn’t an asset, and it does have financial statement impact.

Deferred revenue sits on the books as a liability because cash has been collected for a product or service that hasn’t yet been delivered. The company has an obligation to provide that product or service in the future, so the amount isn’t revenue yet and isn’t an asset either. As fulfillment occurs, the liability decreases and revenue is recognized in the appropriate period.

Thinking about taxes and future expenses helps explain why this is the right explanation. When the revenue is finally recognized, it affects taxable income in that period, and there may be costs tied to delivering the promised product or service in the future. So the liability flag reflects an obligation that will impact future financials, taxes, and costs as the obligation is fulfilled. The other options don’t fit because the cash is already in hand (not increasing future cash), it isn’t an asset, and it does have financial statement impact.