deferred revenue
Money received from customers for goods or services not yet delivered, recorded as a liability until the obligation is fulfilled.
Example
“When customers paid annual subscriptions upfront, the software company recorded deferred revenue and recognized it monthly.”
Memory Tip
DEFERRED revenue = cash received but not yet EARNED. A liability — you still owe the service.
Why It Matters
Understanding deferred revenue helps you recognize that money in your bank account is not always yours to keep. If you receive advance payments from customers, you have an obligation to deliver goods or services, which means that cash represents a future liability that could affect your financial position.
Common Misconception
Many people mistakenly believe that receiving money from a customer means you can immediately record it as profit or income. In reality, deferred revenue must be recorded as a liability on your balance sheet until you actually deliver the product or complete the service.
In Practice
A software company sells a one-year subscription for 1200 dollars upfront in January. On the balance sheet, they record 1200 dollars as deferred revenue (a liability). Each month, as they provide the service, they recognize 100 dollars as actual revenue and reduce the deferred revenue liability by 100 dollars, so by December the deferred revenue is zero and all 1200 dollars has been earned.
Etymology
DEFERRED (postponed, delayed) REVENUE. Revenue that must be DEFERRED (delayed) until earned.
Common Misspellings
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Related Terms
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See Also
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