What is the proper journal entry for recognizing deferred revenue from a sale?

When recognizing deferred revenue from a sale, the proper journal entry acknowledges receiving cash for goods or services that have not yet been delivered or performed. In this context, the entry reflects a liability because the company has an obligation to provide something to the customer in the future.

The correct journal entry begins with a debit to Cash, indicating that cash has been received and therefore increases the cash account. This transaction shows the company has gained liquidity. The corresponding credit is to Deferred Revenue, which reflects a liability on the balance sheet. This entry signifies that the company now owes a good or service to the customer in the future. It captures both sides of the transaction correctly, aligning with the accounting principle that each entry has a dual impact on the accounting equation.

This method of accounting for deferred revenue ensures that revenue is recognized in the proper period, consistent with the revenue recognition principle, which mandates that revenue should only be recognized when it is earned, not necessarily when cash is received.