What is Deferred Revenue?

  • Finance

Deferred revenue represents money received from customers for goods or services not yet delivered. This creates a liability on your balance sheet because you owe customers either products, services, or refunds. It’s also called unearned revenue or advance payments.

Common Examples:

  • Annual software subscription fees paid upfront
  • Prepaid maintenance contracts
  • Gift card sales before redemption
  • Advance payments for custom manufacturing

When you receive payment before providing the service, you record it as deferred revenue rather than immediate income. As you fulfill obligations, you gradually recognize this as actual revenue on your income statement.

Accounting Process:

  • Record initial payment as deferred revenue (liability)
  • Recognize revenue monthly or as services are delivered
  • Reduce deferred revenue balance accordingly

This accounting method ensures accurate financial reporting by matching revenue with the period when services are actually provided. Companies like Netflix, Adobe, and gym memberships commonly deal with deferred revenue.

Understanding deferred revenue helps business owners manage cash flow expectations and comply with accounting standards. It also provides insight into future revenue commitments and customer prepayment patterns.

R&D Offer Quiz

Step 1 of 3

Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.