Deferred Revenue

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DEFINITION of 'Deferred Revenue'

Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been rendered or products have been delivered. Deferred revenue is a liability because it refers to revenue that has not yet been earned, but represents products or services that are owed to the customer. As the product or service is delivered over time, it is recognized as revenue on the income statement.

BREAKING DOWN 'Deferred Revenue'

For example, a company that receives an advance payment of $100,000 for delivery of a product would book it as deferred revenue on its balance sheet. Once it delivers the product to the customer, the company would transfer the $100,000 from the deferred revenue account to regular revenue on its income statement.

Software companies generally have sizable amounts of deferred revenues on their balance sheets, typically representing license fees and annual maintenance charges. Analysts study trends in deferred revenues of such companies for a better indication of their financial performance.

Recording unearned revenues on the income statement, rather than as deferred revenues on the balance sheet, may be considered as aggressive accounting, as it would have the effect of overstating revenues.

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RELATED FAQS
  1. Does unearned revenue affect working capital?

    Unearned revenue, or deferred revenue, typically represents a company's current liability and affects its working capital ... Read Full Answer >>
  2. How is deferred revenue treated under accrual accounting?

    In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds ... Read Full Answer >>
  3. Can unearned rent be considered deferred revenue?

    Unearned rent can be considered deferred revenue from the perspective of a landlord or rental company, if that landlord or ... Read Full Answer >>
  4. What are some examples of deferred revenue becoming earned revenue?

    Deferred revenue represents payments received by a company in advance of delivering its goods or performing its services. ... Read Full Answer >>
  5. What types of companies tend to have the most deferred revenue?

    The types of companies that tend to have the most deferred revenue are those that accept high amounts of payments prior to ... Read Full Answer >>
  6. What is the difference between deferred revenue and accrued expense?

    Deferred revenue is the portion of a company's revenue that has not been earned, but cash has been collected from customers ... Read Full Answer >>
  7. Why is deferred revenue listed as a liability on the balance sheet?

    Deferred revenue, which is also referred to as unearned revenue, is listed as a liability on the balance sheet, because under ... Read Full Answer >>
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