The types of companies that tend to have the most deferred revenue are those that accept high amounts of payments prior to the delivery of their goods or services. Such companies include prepaid service companies such as maintenance workers, ticket sellers such as airlines or sports venues, or online sellers of goods such as Amazon.
Under the accrual accounting method, deferred revenue is cash received by a company prior to the delivery of its goods or services. The deferred, or unearned, revenue is recorded as a liability on a company's balance sheet until the goods or services are delivered, after which the money is moved from the deferred revenue account and is recognized as earned revenue on a company's income statement.
Deferred revenue is considered a liability because the revenue recognition or earnings process is not yet complete, and a company's goods or services are still due to the buyer or customer.
A good example of the type of company that would have high levels of deferred revenue is a magazine subscription service. If the magazine service accepts yearly subscriptions, paid annually, the amount received from its customers would be classified as deferred revenue.
If the magazine company delivers a magazine once a month, one-twelfth of the yearly subscription would be recognized as earned revenue each month. This is due to the fact that the customer bought the good and service of 12 magazines, delivered monthly. Revenue is deferred and only recognized once the good or service has been delivered.