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.