Deferred revenue - What is deferred revenue?
Deferred revenue is income that has not yet been earned but is has already been paid by a customer for a product or service
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Also sometimes called ‘deferred income’ and ‘unearned revenue’, all versions refer to payments that are made in advance - before the product is delivered or the service carried out by the business that has received the funds.
As soon as the goods or service are provided to the customer, the business can then mark the payment as revenue.
Deferred revenue in accounting
The reason it is recorded as a liability is because the amount actually represents the value of what is still owed to the customer, even though it is technically income.
When does deferred revenue occur?
Most often, businesses that work on a recurring basis, such as subscriptions, cleaning businesses, web management, etc. can see income paid ahead of time for a certain time period (a year in advance, for example).
When the services are carried out or the products delivered, the deferred revenue can be adjusted to be categorised as revenue, either partially or in full depending on the goods or service.
Sam runs a website maintenance business. He is responsible for keeping up several websites and offers monthly payment options for his range of services, which involve regular security updates, performance tests, and more. Sam charges £400/month. A client has asked to pay for the full year in advance.
Sam receives the full £4,800 at once and would then record the amount as deferred income and classify it as a liability in his accounting system. As the months progressed and he carried out the work on that client’s website, he would gradually mark each monthly portion (£400 each month from the total) as revenue.
Deferred revenue in accounting software
Working with invoicing & accounting software can simplify the process of handling income. In Debitoor, a payment can be matched with multiple invoices, making it easy to keep track of the distribution of deferred revenue over a period of time.