Deferred Revenue

AAA

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.

 

INVESTOPEDIA EXPLAINS '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.

VIDEO

RELATED TERMS
  1. Revenue

    The amount of money that a company actually receives during a ...
  2. Revenue Recognition

    An accounting principle under generally accepted accounting principles ...
  3. Revenue Officer

    An individual who collects revenues such as taxes and duties ...
  4. Deferred Charge

    A prepaid expense that is treated as an asset on a balance sheet ...
  5. Liability

    A company's legal debts or obligations that arise during the ...
  6. Bill-And-Hold Basis

    A method of conducting sales by billing the customer on the same ...
Related Articles
  1. Investing

    What does Deferred Revenue Mean?

    Deferred revenue is advanced payments received by a company for products or services that it has not yet rendered or shipped. Another term for deferred revenue is unearned revenue. Whereas normal ...
  2. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  3. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  4. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  5. Fundamental Analysis

    What is considered a good PEG (price to earnings growth) ratio?

    Learn about the price/earnings to growth (PEG) ratio and understand what investors and market analysts consider a good ratio for this valuation measure.
  6. Fundamental Analysis

    What is the formula for calculating the quick ratio in Excel?

    Understand the basics of the quick ratio, including how it is used as a measure of a company's liquidity and how to calculate it in Microsoft Excel.
  7. Fundamental Analysis

    What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between the two terms.
  8. Fundamental Analysis

    Should companies break out accounts receivables into subledgers?

    Find out why every company that sells on credit should break down its accounts receivable into individual customer subsidiary ledgers, or subledgers.
  9. Fundamental Analysis

    Are taxes calculated in operating cash flow?

    Learn how taxes are involved with the calculations for operating cash flow, and find out about the importance of operational cash flow.
  10. Fundamental Analysis

    What are the main benchmarks that track the oil & gas drilling sector?

    Read about several different types of benchmarks that investors can use to track the overall performance of the oil and gas drilling sector.

You May Also Like

Hot Definitions
  1. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  2. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  3. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  4. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  6. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
Trading Center