Deferred Revenue

Deferred revenue refers to payments a company receives in advance for goods or services that have not yet been delivered. This payment is recorded as a liability on the company’s balance sheet because the company owes the service or product to the customer. Once the product is delivered or the service is provided, the deferred revenue is recognized as earned revenue on the income statement. This accounting practice is common in subscription-based businesses, software services, and other industries where customers prepay for future deliveries.

Example

A software company that sells a one-year subscription to its service receives payment upfront but recognizes the revenue monthly as the service is delivered.