Deferred Revenue Explained: 8 Examples of Deferred Revenue

Deferred revenue is the prepayment for goods or services that a company will provide in the future. Despite the influx of upfront cash, deferred revenue appears as a current liability on a company's income statement until the company delivers the goods or services. Also known as deferred income, this money passes through a company's accounts receivable department and is logged as sales revenue on a cash flow statement only after the client receives the promised goods or services.

This process is known as deferred revenue recognition. On one end of the transaction is the company, which receives cash flow in the current accounting period but will need to deliver goods or services in a future accounting period to complete the transaction. On the other end of the transaction is the client or customer. The client makes an advance payment and logs the transaction as a prepaid expense on their balance sheet. The prepaying company will file the half-completed transaction in an asset account because it is due to receive valuable goods or services in a future accounting period.

Companies regard deferred revenue as a liability account on their financial statements because a deferred revenue balance represents incoming cash, but it also represents an obligation to fulfill an order in the future. Upon fulfilling the order, the company may consider the money to be earned revenue; until the point of fulfillment, the money is considered unearned revenue.

Under generally accepted accounting principles (GAAP), companies are advised to report their income conservatively and avoid presenting a deferred revenue account as working capital on a balance sheet. Companies use the accrual method of accounting to accurately show how deferred income functions as a liability—not an asset—in a given fiscal year. However, smaller companies that cannot staff an accounting department or pay a CPA may use a cash-based accounting method that represents deferred revenue as net income. This method may be appropriate for small companies that are not seeking outside investors, but companies may raise ethical concerns if they use the deferred income to inflate an outside valuation.

There are many real-world examples of deferred revenue, or prepayments for future goods and services.

1. 1. Mobile phone industry: A mobile phone provider accrues deferred revenue when it bills customers on prepaid calling plans.
2. 2. Startups: A startup company getting preorder revenue to pay for its first manufacturing run accrues unearned income until it delivers the preordered products.
3. 3. Entertainers: It’s common for musicians to receive deposits for live performances that may be several months or a year away.
4. 4. Film industry: A film producer getting an inflow of cash from an investor during preproduction has to complete the project to consider the cashflow earned revenue.
5. 5. Publishing industry: A magazine company receiving full payment for an annual subscription must deliver one year’s worth of magazines to earn the revenue.
6. 6. Online retailers: A common example of deferred revenue, online retailers typically charge a customer's credit or debit card before shipping that customer's order.
7. 7. Live events: Ticket retailers sell concert tickets for events scheduled to take place months in the future.
8. 8. Automobile industry: It’s common for car dealerships to take deposits on cars they will not deliver to customers for several weeks or months.

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