Reviewed by Sep 28, 2020| Updated on
Meaning of Deferred Revenue
Deferred revenue, also called unearned revenue, applies to advance payments obtained by a company for goods or services that are to be provided or performed in the future. The company which receives the prepayment reports the sum on its balance sheet as deferred revenue, a liability.
Deferred revenue is a liability because it indicates non-earned income and covers goods or services owed to a client. Because the good or service is distributed over time, revenue on the income statement is recorded proportionally.
How Does Deferred Revenue Function?
Deferred revenue is known as a liability on a company's balance sheet which receives an advance payment. Since it is due in the context of the goods or services, it has a responsibility towards the consumer.
The payment is considered a liability to the supplier since the risk exists that the product or service will not be delivered, or the customer will cancel the order. The business would need to compensate the customer in this case, unless other terms of payment were expressly specified in a signed contract.
Contracts can stipulate specific conditions, requiring no revenue to be reported before all services or goods are delivered. In other terms, the customer's accumulated payments will stay in accrued revenue until the consumer has earned in full what was owed under the contract.
How is Deferred Revenue Reported?
Deferred revenue is usually listed on a company's balance sheet as a current liability since the deferred terms are generally 12 months or less. Nevertheless, a consumer may make an upfront prepayment for services that are supposed to be provided for many years. In this case, the portion of the expenditure relating to services or goods to be provided after 12 months from the date of expenditure will be listed as deferred revenue under the balance sheet's long-term liability segment.