Why it matters
Deferred revenue keeps a large upfront payment from inflating one period's revenue. It also shows the obligation the business still owes the customer, which matters to a lender, an investor or a buyer.
Example
A client pays $12,000 in January for a year of service. The bookkeeper records the cash and a $12,000 deferred revenue liability, then recognizes $1,000 of revenue each month as the service is delivered.
Related terms
Questions about Deferred revenue
Is deferred revenue the same as unearned revenue?
Yes. Deferred revenue and unearned revenue both describe a payment received before the service is delivered. The account name depends on the accounting system.
When does deferred revenue become revenue?
It becomes revenue as the business delivers the service or transfers the good. The timing depends on the contract and the accounting method.