What is Deferred Revenue (Definition & Examples)

July 25, 2022

What is Deferred Revenue (Definition & Examples)

Deferred revenue is a balance sheet liability that represents the amount of money owed to your company by your customers but which has not yet been invoiced. It is most often found in subscription-based businesses, where customers pay for products or services on a recurring basis.

Deferred revenue is often used as a measure of cash flow because it includes money owed by customers that has not yet been invoiced and therefore cannot be used toward day-to-day operations. It also helps you determine how much money you can expect to receive in the near future.

This article will explain the concept of deferred revenue in more detail and give some examples of how deferred revenue works on balance sheets.

What is deferred revenue with examples?

The most common reason for deferred revenue is when a company sells a product or service on an annual or semi-annual basis (such as with an annual subscription).

One deferred revenue example would be if you sold a subscription for $20 per month, and your customer committed to paying $120 over six months. If they signed up at the beginning of January and subscribed for six months' worth of service, you would record $120 in deferred revenue at the time of sale - $20 x 6 months = $120.

This is a simple deferred revenue accounting example, but it illustrates the point well. Most SaaS companies and services platforms, such as Netflix, Disney, Amazon etc., will record a significant amount of deferred revenue on balance sheet.

Is deferred revenue an asset or revenue?

Now you know a bit more about deferred revenue, but what type of account is deferred revenue? Well, in general, assets are things that have value, and revenue is the money received from selling goods or services. Deferred revenue is a special case of revenue. It refers to money that has been earned by selling goods or services but has not yet been received by the company.

Deferred revenue is often called "accrued" revenue in accounting terms, but they are not the same thing. Accrued revenue means that the company has earned money but has not yet paid it out (for example, if it has an outstanding invoice).

In financial accounting, deferred revenue is considered an asset because it represents a future benefit to the company. The company expects to receive this money in cash flows in future periods, so it's something that can be used to generate cash flows in future periods (or used as collateral against debt).

Is deferred revenue an asset or liability?

Deferred revenue is typically classified as an asset if it is expected that the company will receive payment for the services provided and can be reasonably estimated. The deferred revenue account balance represents the amount of money customers owe for services already provided.

This does not include any sales tax collected from customers that have not been remitted to the government yet. Revenue that meets those criteria would be classified as an asset because it is expected to be collected in full and on time.

That said, deferred revenue can also be a liability in the sense that you have been paid for something or expect to be paid for something which you have not yet delivered. Therefore, depending on how you look at it, deferred revenue can be classed as both an asset and a liability.

Is deferred revenue an expense?

No, deferred revenue is not an expense. It can be classed as either an asset or a liability, depending on the situation. Deferred revenue occurs when a company receives cash but has not yet delivered the goods or services promised to its customers.

For example, if you pre-order something online and pay for it in advance, but it isn’t released until several months later, then you have deferred revenue on your balance sheet. Because you haven’t yet received anything in exchange for your payment, you should not count it as an expense.

Summary

Deferred revenue is money received by a company that has not yet been recorded on its books. This can happen when a customer makes an advance payment for goods or services or when the company receives payment for something that has not yet been delivered. In most cases, deferred revenue refers to revenue from contracts with customers and other parties that is recognized over time rather than immediately.

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