Deferred Revenue

Deferred Revenue is a Balance Sheet liability that refers to revenue that has been paid for but cannot be recognized yet because the services have not been rendered yet. It is a liability on the Balance Sheet. Think of it as the inverse of Accounts Receivable which refers to bills to customers for revenue where the service has been rendered, but not yet paid.

Here’s an example:

Let’s say we were looking at a facilities management (a) company that served hospitals (b), they would likely have a multi-year contract with the hospital. Now they couldn’t recognize the entire contract value at once, they would need to recognize the monthly amortized value of the contract each month as Revenue.Switch (a) and (b) as needed to match your industry.

It’s a bit of a weird concept, but once you draw the line between Accounts Receivable and Deferred Revenue, it becomes pretty easy to grasp.