Definition
Deferred Revenue
Deferred revenue, or unearned income, is money received from customers for goods or services not yet delivered, recorded as a liability until earned.
When a company collects payment in advance, such as annual software subscriptions or maintenance contracts, it cannot recognise it as revenue immediately. Instead it sits on the balance sheet as deferred revenue, a liability, and is released to the P&L as the service is delivered.
Growing deferred revenue can be a positive sign, indicating strong advance bookings and future revenue visibility, common in subscription and SaaS businesses. It reflects the gap between cash collected and revenue earned under revenue recognition rules.
Related terms
- Cash Flow StatementThe cash flow statement reconciles a company's profit to its actual cash movements, split into operating, investing and financing activities.
- Accruals (Accounting)Accruals are revenues earned or expenses incurred that are recognised in the accounts before the related cash is received or paid, following accrual accounting.
- Revenue RecognitionRevenue recognition is the accounting principle determining when and how much revenue a company records, based on the transfer of goods or services to customers.
- Contract LiabilityA contract liability is an obligation to transfer goods or services to a customer for which the company has already received payment, similar to deferred revenue.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.