Deferred revenue is a liability that represents cash received for goods or services not yet delivered or performed. It is recorded on the balance sheet until the related revenue can be recognized as earned income.
5 Must Know Facts For Your Next Test
Deferred revenue is considered a current liability if the service is to be provided within one year.
Common examples include subscription fees, advance payments, and retainer fees.
It ensures compliance with the revenue recognition principle in accounting.
Once the service or good is delivered, deferred revenue gets reclassified to earned revenue on the income statement.
Companies must regularly review deferred revenue accounts to ensure accurate financial reporting.
Review Questions
What type of liability is deferred revenue classified as?
Why is deferred revenue recorded on the balance sheet?
When does deferred revenue get recognized as earned income?
Related terms
Accrued Liabilities: Expenses that have been incurred but not yet paid.
Unearned Revenue: Another term for deferred revenue, indicating payment received before delivery of goods or services.
Revenue Recognition Principle: An accounting principle that dictates when and how much revenue should be recorded in financial statements.