Deferred Revenue

Definition

Deferred Revenue (also known as Unearned Revenue) represents cash received by a company from customers for goods or services that have not yet been delivered or rendered. It signifies an obligation to provide value in the future. It is recorded as a Liability on the Balance Sheet.

Accounting & Cash Flow Treatment:

1. Initial Cash Receipt:
   • Cash increases (Balance Sheet Asset).
   • Deferred Revenue increases (Balance Sheet Liability).
   • Cash Flow Impact: The increase in the Deferred Revenue liability is a source of cash on the Cash Flow Statement (added back in CFO), as cash was received but revenue wasn’t recognized.
   • No immediate impact on Income Statement.
2. Revenue Recognition (Over Time):
   • As goods/services are delivered, revenue is recognized on the Income Statement.
   • The Deferred Revenue liability decreases (Balance Sheet).
   • Cash Flow Impact: The decrease in the Deferred Revenue liability is a use of cash adjustment on the Cash Flow Statement (subtracted in CFO) because the revenue recognized did not correspond to a cash inflow in that period.

Examples:

• Software subscriptions paid upfront.
• Annual maintenance contracts.
• Magazine subscriptions.
• Gift cards issued.

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See also: Revenue Recognition Principle, Liabilities, Balance Sheet, Cash Flow Statement, Income Statement