What Is Deferred Revenue: Meaning, Examples & Treatment In Accounts

Deferred revenue refers to the money a business collects before delivering its product or service. Although you receive payment in advance, you cannot consider it as income until you complete the promised service. Until then, you need to show it as a liability in the accounts. 

Suppose an online education platform charges ₹12,000 in advance for a 6-month digital marketing course. Even though they will collect the amount immediately, they have not earned it yet. 

The company is required to provide the learning services over six months. So, only ₹2,000 is treated as income each month. The remaining amount stays as deferred revenue till it is earned.

This is an example showing how advance payments are handled in accounting to maintain transparency and compliance. This blog will help you understand deferred revenue better by using relatable examples. Further, we will see its treatment in accounts.

What Does Deferred Revenue Actually Mean?

In simple terms, deferred revenue is advance money received for work not yet completed. Since the service or product has not been delivered, it is not right to record this money as revenue immediately. The following table shows the characteristics of deferred revenue:
 

The above-mentioned characteristics in the table explain why deferred revenue is treated carefully in accounting to reflect an accurate financial position and service status.

Read More –What is Accrued Income – Meaning, Examples, and How It’s Recorded

Why Is Deferred Revenue Important?

For accurate financial reporting, it is necessary to recognise revenue at the right time. If you treat an advance payment as deferred revenue, then it helps you prevent inflating the income of a particular period.

It is useful to know how earned revenue differs from deferred revenue. The table below offers a clear comparison.
 

You can see in the above-mentioned table that the classification depends entirely on the delivery status of the product or service.

Examples Of Deferred Revenue

Advance payments are a common practice in many industries. Some examples include:

• Annual Subscriptions: Be it for magazines or OTT platforms.
   
• School and College Fees: Paid before classes start.
   
• AMC Contracts: Payments collected for yearly equipment maintenance.
   
• Software Licences: Especially for SaaS products with yearly billing.
   
• Event Bookings: Like concerts, seminars, or hotel reservations. 

Let’s take one of these cases and break it down further. The following table shows how you will treat prepaid gym memberships:
 

From the above-mentioned table, you can see that the entire amount is collected upfront. However, the income is recognised monthly as services are provided.

Accounting Treatment Of Deferred Revenue

Suppose you own an OTT platform. Your customer buys a yearly subscription of ₹3,600. This amount does not become part of your income immediately. 

Instead, you will record it as a liability. You will reduce this amount over time as your business delivers services. In your case, you will write off ₹300 per month as income. 

There are two steps to record deferred revenue in accounting:

1. When you receive money:
    

• Bank Account is debited (cash increases)
• Deferred Revenue is credited (liability increases)
   

2. When you deliver service:
    

• Deferred Revenue is debited (liability reduces)
• Sales or Revenue is credited (income increases)
  
  Also Read - What is a Balance Sheet : Meaning, Format, Importance & Components
   

Let’s look at a detailed journal entry of your company. The following table shows the journal entry of ₹3,600 you received for a yearly subscription:
 

From the above-mentioned table, you can see that the first entry was made when you received an advance payment of ₹3,600. However, the second entry of ₹300 will be made at the end of each month for 12 months to show income earned.

Where Is Deferred Revenue Shown In Accounts?

Deferred revenue sits in the liabilities section of the balance sheet. As you have received the money but have not earned it yet. The classification (current liabilities or non-current liabilities) depends on when the service is expected to be completed.

• If you deliver a product or service within the next 12 months, then it is shown as current liabilities. 

For example, the yearly subscription fees of ₹3,600 will be shown under current liability in the balance sheet.

• If you deliver a product or service after 12 months, then it is shown as non-current liabilities. 

For example, an anti-virus company provides a 3-year subscription for ₹24,000. This ₹24,000 will be shown as non-current liability in the balance sheet.  

Final Thoughts

Deferred revenue shows the financial responsibility your business carries after receiving payment in advance. Instead of rushing to show this money as income, accounting principles require businesses to recognise it gradually as you fulfil your promise.

This approach makes sure that income matches the service period. This ensures your financial statements reflect the company’s actual business condition. 

For businesses that run on subscriptions, prepaid services, or long-term contracts, handling deferred revenue accurately is not just a best practice; it is a necessity.

FAQs

1. Does deferred revenue affect profit immediately?

No, it doesn’t impact profit until the revenue is earned.

2. Why is it important to record deferred revenue?

It maintains accurate financial statements and avoids overstating revenue.

3. Does deferred revenue show in the profit & loss account?

No, not until it is recognised as income.

4. Is deferred revenue refundable?

It may be, depending on the terms of service or agreement.