What is Deferred Revenue?

Understand deferred revenue and how it is reported in financial statements.

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What is Deferred Revenue?

Deferred revenue represents the amount of money that has been received from customers for goods or services not yet delivered.  It is a critical component of accrual accounting as it ensures that revenue is recognized as it is earned. 

Is deferred revenue on the income statement?

Deferred revenue is a liability on a company’s balance sheet as it represents the amount of money that has been received from a customer for goods or services that have not yet been delivered or provided. This means that the company has an obligation to provide the goods or services to the customer in the future.

For example, if a university invoices its students at the start of the term, it will record deferred revenue at the start of the term as a liability on the balance sheet.  In a three month term, the revenue would be recognised equally over those three months.  

Is deferred revenue working capital?

Yes, deferred revenue is most typically included in working capital.

On rare occasions, when the goods or services are provided over a period longer than 12 months, deferred revenue may be reconsidered as a long term liability.  In this case, it is not part of working capital.

What is a deferred revenue journal entry?

Deferred revenue journal entries are the accounting transactions used to record the recognition of deferred revenue on a company’s financial statements.

Most typically, a single deferred revenue transaction will generate many accounting journal entries.  As an example, if a company supplies software under an annual contract for $12,000, the deferred revenue journals will be:

When the invoice is issued:

  • Debit  Accounts Receivable $12,000
  • Credit Deferred revenue:  $12,000

Every month of the contract:

  • Debit  Deferred Revenue  $1,000
  • Credit Sales or Revenue:  $1,000

Sadly, accounting systems such as Xero and QuickBooks do not automate this process.  Many finance teams resort to lengthy spreadsheets, running to 1000s of lines, and creating a lengthy month end close process. Software such as ScaleXP can fully automate deferred revenue and revenue recognition for finance teams, saving hours of tedious spreadsheet tracing.

Can deferred revenue be negative?

Negative deferred revenue is extremely rare but can occur.  Here is an example:

  • A customer subscribes to an annual contract and is issued an invoice for $12,000
  • They pay the invoice immediately
  • The supplier recognises $1000 of revenue per month
  • After 3 months, the customer cancels, claiming the service was subpar.  They receive a full refund ($12,000).

In these circumstances, deferred revenue could be negative temporarily.  Once all accounting entries are complete, however, the deferred revenue balance will be $0 as the supplier no longer has any obligation to the customer.

Can you record deferred revenue before receiving cash?

It is possible for a company to record deferred revenue before receiving cash from a customer. This can happen if the company has entered into a contract with the customer to provide goods or services over several months, and the customer has agreed to pay in advance. In this case, the company can record the deferred revenue on its balance sheet even if it has not yet received the cash payment from the customer.

In summary, deferred revenue is a type of revenue that has been invoiced but has not yet been recognised. It is typically recorded as a liability on the balance sheet and is recognised over time as the company delivers the goods or services to the customer. Understanding deferred revenue is crucial for businesses, as it helps them accurately track and report their financial performance.

Find out more about how ScaleXP can automate deferred revenue recognition here.