What happens to Deferred Revenue after the goods or services are delivered?

• A. It becomes real revenue on the Income Statement and the Deferred Revenue balance decreases.
• B. It remains a liability forever.
• C. It increases cash balances automatically.
• D. It becomes an asset.

Answer: (A)

When goods or services are delivered, a company has satisfied its obligation, so the deferred revenue is no longer a liability and the revenue is earned. The proper entry is to reduce the liability by debiting Deferred Revenue and to recognize revenue by crediting Revenue. Since cash was typically received when the order was placed, there’s usually no cash effect at delivery. This is why the deferred revenue balance decreases and the Income Statement shows revenue for the period. Deferred revenue is not an asset, and it doesn’t stay as a liability forever.