What is the journal entry to record the earnings of deferred revenue?

• A. Debit cash, credit deferred revenue
• B. Debit revenue, credit receivables
• C. Debit deferred revenue, credit revenue
• D. Debit revenue, credit cash

Answer: (C)

The correct journal entry to record the earning of deferred revenue involves debiting deferred revenue and crediting revenue. This process reflects the recognition of revenue that was previously received as a liability when the cash or promise was accepted.

When a company initially receives cash for a service or product that will be delivered in the future, it records this amount as deferred revenue, recognizing that it has an obligation to provide goods or services later. As the company earns the revenue by delivering the service or product, it needs to adjust its accounts to accurately reflect this change in its financial position.

By debiting deferred revenue, the company reduces its liability, signifying that it has fulfilled its obligation. At the same time, crediting revenue increases the revenue account, which reflects that the earnings process is complete and the company can now recognize this amount as income in its financial statements.

This entry ensures that both the balance sheet and the income statement reflect the proper financial performance and position of the company, adhering to the revenue recognition principle under accounting standards.