The Daily Technical #133: What are deferred tax liabilities (DTLs)?

How to answer "Why is deferred revenue classified as a liability while accounts receivable is an asset?"

March 14, 2025

Good evening. Welcome to the 133rd edition of The Daily Technical.

Now, you’re here for one reason, so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Why is deferred revenue classified as a liability while accounts receivable is an asset?

Deferred Revenue: For deferred revenue, the company received payments upfront and has unfulfilled obligations to the customers that paid in advance, hence its classification as a liability.

Accounts Receivable: A/R is an asset because the company has already delivered the goods/services and all that remains is the collection of payments from the customers that paid on credit.

Common Mistakes

  1. Misunderstanding the timing of cash flow versus service delivery. Ensure you recognize that deferred revenue involves receiving payment before the service, while accounts receivable involves providing service before receiving payment.

  2. Overlook why deferred revenue is a liability. Remember, the company must fulfill a service or deliver a product, creating an obligation. Always link liabilities to obligations.

TL;DR

  • Deferred Revenue is a liability due to the company's obligation to deliver goods/services after receiving payment.

  • Classified under liabilities as the company owes service/product delivery to customers.

  • Accounts Receivable is an asset reflecting the company’s delivery of goods/services for which payment is pending.

  • It represents a future cash inflow, thus listed as an asset on the balance sheet.

  • The difference stems from the obligation to perform (liability) vs. the right to receive cash (asset).

TODAY’S QUESTION
What are deferred tax liabilities (DTLs)?

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