Deferred Revenue

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What is 'Deferred Revenue'

Deferred revenue refers to 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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