What Is Deferred Revenue?

You may have noticed different types of revenue on your financial statements—one being deferred revenue. Understanding deferred revenue can help you to develop clearer insights into the financial standing of your business, which will enable you to make more strategic decisions. 

Keep reading to learn more about deferred revenue and how it applies to your business.

Deferred Revenue, Defined

Deferred revenue is also called “unearned revenue” and refers to income from services that have not been performed yet. In this case, the business owner has cash on hand without accounting for labor hours, materials, and delivery—all of which will be performed in the future. A few examples of deferred revenue include:

• A customer paying in 3-month increments
• A contractor taking a 50% deposit up front for services
• A baker receiving a down payment to bake a wedding cake 

In each of these examples, the revenue is unearned because the business owners have yet to fulfill their end of the transaction, even though the customer has completed theirs.

Where Can You Find Deferred Revenue?

You can find deferred revenue on the liabilities section of your company’s balance sheet. Even though it seems like this form of revenue is income or cash, it actually serves as a risk to the organization. 

Deferred revenue represents value that you owe to your customers. When you “pay” your customers with the goods or services you provide, the revenue is no longer a liability and can then be moved into assets. 

What Happens if You Can’t Pay Your Customers?

If you can’t provide your customers with the goods or services you promised—or you need to provide a “make good,” or refund, on the items—then you can move the deferred revenue into the refunds or lost income sections of your balance sheet. This process will help you to track your lost earnings accurately. 

Why Should You Separate Deferred Revenue? 

Allocating funds as deferred revenue can help you to avoid overspending on your business and overpromising goods and services to customers. 

For example, suppose you bring in $10,000 in revenue, and $4,000 of that is deferred revenue. You know that you’ll need at least $4,000 for the materials, labor, and other costs to provide the agreed-upon services to your customers. You can also see that you really only have $6,000 in revenue-based assets to spend on other costs or invest in your business. 

What’s the Difference Between Accrued Revenue and Deferred Revenue? 

Accrued revenue is the opposite of deferred revenue: it’s money that the company is owed for providing goods and services for which it has not been paid yet.

For example, a marketing firm might design logos and an ad campaign for a client. After the materials are delivered, the value of the work stays in the accrued revenue column until the agency sends an invoice. That value would then become accounts receivable. 

The accrued revenue is located in the assets column. 

Know Your Bookkeeping Terms  

Knowing the differences between various revenue streams can help you to plan for the future and ensure you have enough cash on hand. Check out the Bookkeeping 101 resources created by Lendio to understand your ledgers better and master the basics of accounting for your small business.

_{Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}