Definition: The deferred revenue, also called unearned revenue, is advanced payments made for products and services that will be delivered to the customer at a future date. This is a liability because the company still owes the customer a good or service at the time this is recorded.
What Does Deferred Revenue Mean?
What is the definition of deferred revenue? Unearned revenues are important to the financing the business core operations without using the company assets or a credit line. Firms report this deferral as a liability on the balance sheet because it represents a prepayment on an uncompleted order, expecting the delivery of the ordered good or service to the customer.
Typical examples of deferred revenues include prepaid insurance policies, annual subscriptions to magazines and newspapers, and others. Once the product or the service is delivered and the order is complete, the firm debits the deferred account and credits sales account. These sales are then reported on the income statement.
Let’s look at an example.
Example
Company XYZ is a software company that sells an antivirus program for PCs and tablets. The company receives advance payments from customers who purchase the software online and expect to download the program on their PCs and tablets once the company receives the payment. However, as the company receives a lot of downloading requests on a daily basis, the manager has decided to check the credibility of the credit cards used in the advance payments and allow the downloading of the software the following day of the prepayment.
The software company receives $50 in advance payments per client per day. The firm’s accountants record each payment as a liability in the balance sheet until the company delivers the software to the customer. Once the customer receives the download link and gets the software, the order is completed and accountants move the payment from the deferral account to the revenues account. By the end of the fiscal year, the deferred revenue balance will be zero and all of the payments will become revenue on the income statement.
Summary Definition
Define Deferred Revenue: Deferred revenue means a liability that companies recognize when they receive payments from customers before they deliver goods and services to them.
