Updated on March 2, 2023
Deferred Revenue is a term used in accounting for ‘unearned’ revenue. It is recorded as ‘deferred’ when a company receives payment for goods or services in advance. Unused gift cards, Subscription plans, Insurance premiums are examples of payments which are generally received in advance without the final good or service delivered to the customer yet.
Deferred Revenue Explained
On receipt of an advance payment, a company records the amount as deferred revenue, which will reflect as a liability on its balance sheet. It is recorded as a liability because it is an amount or revenue which has not been earned yet. It thus represents a product or service which is an obligation or which the company owes to the customer, because the payment has been received for a product or service, which may remain undelivered or unfulfilled. As and when the product or service is delivered to the customer in due course, it is recognized and recorded as revenue in the income statement.