What is deferred revenue?
Deferred revenue is advance payments that have been received by a company for goods or services that are to be delivered in the future. It's also known as unearned revenue.
Where have you heard about deferred revenue?
Deferred revenue is the term companies use on their balances sheet to indicate work or products owed to a customer. In everyday life, it's more likely to be called advance payment, as in when you buy tickets for a concert or book a holiday.
What you need to know about deferred revenue.
Deferred revenue appears as a liability in a company's accounts, as the company has a legal obligation to provide the goods or services to the customer in the future. Once the customer receives what they've paid for, the amount can be recorded as sales or service revenue. For example a magazine company that receives £120 for an annual subscription will record a debit entry to the cash and cash equivalent account, and a credit entry to the deferred revenue for £120. As the year progresses and the magazines are sent to the customer the company will recognise revenue each month by recording a debit entry to the deferred revenue account, and a credit entry to the revenue account for £12. By the end of the year the entire balance of £120 is reversed and booked as revenue on the income statement.
Companies that record deferred revenue on their income statement rather than on their balance sheet may be considered to be using aggressive accounting, as it would have the effect of overstating revenues.