Starting a Small Business

Accounting 101: What is Deferred Revenue?

by
Sonu Shukla
on
3/15/2016
Accounting 101: What is Deferred Revenue?

Understanding deferred revenue is a must for any company, but for those businesses looking for investors, to go public, or wishing to scale-up, addressing and clearly defining your assets and obligations is a critical part of the growth process.

What is Deferred Revenue?

Deferred revenue, which may also be referred to as unearned revenue, is the money you have been paid for services you have not yet rendered. This accounting term allows you to classify income from orders, subscriptions and other sales that have been paid for, but not fully provided yet. Listing this money correctly is important; it is not considered to be an asset or profit right away. Even though you have received the cash in hand, it is still considered a liability on your balance sheet until you actually deliver the goods or perform the service you have sold. If the goods or services are not delivered the money may be returned to the customer.

Types of Businesses with Deferred Revenue

Any business, large or small, can have deferred revenue of some type, but some products or services lend themselves more readily to the concept. Some businesses or products that often generate referred revenue include:

  • Subscription services, including periodicals, SaaS and other products billed in advance and delivered over time
  • Subscription food, beauty, crafting and other consumer goods delivered monthly to the end user but billed annually or semiannually
  • Contractors or subcontractors performing work in a business or residence
  • Artists working on commission
  • Lawyers and other professionals working on a retainer basis
  • Rental fees or income when paid in advance
  • Insurance if paid in advance or prepaid for the year
  • Event ticket sales, from concerts to parties, sporting events and more
  • Cleaning or other service contracts that are billed or paid in advance
  • Daycare or other services when paid in advance
  • School tuition for private school, classes or tutoring, if paid in full
  • Community Sponsored Agriculture (CSA)

Any business that collects money and delivers goods at a later date will have to cope with deferred revenue. Birchbox and Ipsy, two popular cosmetics and beauty subscription services offer annual and semiannual billing. If you pay for a full year of products today, you’ll receive a box of personal care and grooming items every month for the entire year. The company selling the boxes can count only the boxes it ships as assets; the rest are considered liabilities until they ship to you. Similar services offer everything from yarn to geekery items to consumers, or software, cleaning supplies and publications to commercial buyers. The product does not matter as much as the selling model when it comes to deferred revenue.

Why Deferred Revenue Matters

Properly defining your deferred revenue allows you to create a balance sheet that is truly accurate, with all assets and liabilities correctly and clearly defined. For SaaS software companies, correctly listing deferred compensation for subscription payments allows the business to fully comply with GAAP accounting rules. If you hope to grow, attract an investor or go public, you must have your liabilities and assets listed correctly.

share this post
Search for matches...
Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

SONU SHUKLA, CPA, P.A.
23 reviews

Florida

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

We know tax and accounting issues are complicated.

Do you have additional questions on this topic for this author?

Related Posts

Latest Posts