Deferred Revenue
Candlefocus EditorDeferred revenue is seen whenever a company offers goods or services to customers with pre-payment. This could include subscriptions to periodicals, membership fees for clubs or any other form of advance payment. Examples of deferred revenue include payment for products or services that are made prior to the company's delivery of goods or services; it is recognized on the accounting records as a deferred liability until the goods or services have been provided.
The use of deferred revenue follows generally accepted accounting principles (GAAP). This means that the company’s balance sheet will accurately reflect payments that have been received but not yet utilized for the delivery of goods or services. Deferred revenue can also help to reduce the amount of cash required to facilitate the sale of goods and services.
In order to accurately reflect the timely recognition of deferred revenue on company finances, it must be carefully recorded. For example, if the sale is made and the customer pays in full but the goods or services remain undelivered, the amount would still be recorded as a deferred liability until the goods or services are delivered.
GAAP guidelines also require a company to have measures in place to ensure that if goods or services are not provided as expected, the company must refund the customer as appropriate. Accordingly, recording deferred revenue and distinguishing payments that have been prepaid by customers provides an accurate representation of a company’s true financial position.
Deferred revenue is an important financial tool for any business conducting advance sales. It allows for informed decision-making and effective planning, ensuring that the company’s finances and assets are accurately recorded and ready for review by an accountant or auditor. Deferred revenue helps companies to show the true value of their services provided for any given period, enabling them to manage their business more efficiently.