Deferred Revenue
Payment received for goods or services not yet delivered, recorded as a liability until earned.
Definition
Deferred revenue (or unearned revenue) is money received from customers for goods or services you haven't yet delivered. Until you fulfill your obligation, this payment is a liability on your balance sheet—you "owe" the customer the product or service. As you deliver, deferred revenue converts to recognized revenue.
Common examples include annual subscriptions paid upfront, deposits for future services, and prepaid contracts. The cash is in your account, but accounting rules prevent recording it as revenue until earned. This matches revenue with the period when value is actually delivered.
Why It Matters
Deferred revenue represents a real obligation. You've committed to deliver something of value for money received. If you can't deliver, you may need to refund. Tracking deferred revenue helps you understand true financial obligations versus earned income.
For subscription businesses, deferred revenue can be substantial. A SaaS company with annual prepayments might have millions in deferred revenue. This liability decreases monthly as revenue is recognized—and must be carefully tracked for accurate reporting.
Examples
- 1
A software company records $120,000 in deferred revenue for annual subscriptions, recognizing $10,000 monthly as the service is delivered.
- 2
A landscaper receives $3,000 deposit for spring work in winter—recorded as deferred revenue until services are performed.
- 3
A media company sells $50,000 in annual advertising packages, deferring revenue until ads actually run.
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