Deferred Revenue

 

Deferred Revenue

 

Also known as prepaid revenue or unearned revenue, deferred revenue is the monies received by a business in advance of having earned it. That is, deferred revenues are not yet income and so cannot be reported on the income statement.

For example, if a business receives $5,000 today to perform a service or deliver goods in a future accounting period, that $5,000 is unearned in the current accounting period. It is “deferred” to the accounting period when the actual service is performed or goods delivered. This unearned amount is reported as a liability until such time it can be reported as revenue or income.

Deferred revenue is common in the software and insurance industries where up-front payments are made in exchange for service periods that stretch out over time.

 

Why does Deferred Revenue matter?

 

The general ledger liability account may be called Deferred Revenues, Unearned Revenues, or Customer Deposits. When the deferred amount is “earned,” it is moved to an income statement revenue account such as Fees Earned or Sales Revenue. As a business earns revenue over time, the balance in the deferred revenue account is reduced and the revenue account is increased. Though it is normally classified as a current liability on the balance sheet, a deferred revenue account is sometimes listed as a long-term liability if performance or delivery is not expected within 12 months.



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