Description
Deferred revenue or unearned revenue is the advance payment that a company receives for its products or services that are to be delivered or performed in the future. When a company receives prepayment for such products/services, it records the amount as deferred revenue under the liability of its balance sheet.
Example
Deferred revenue is common for companies that have a subscription-based business model requiring prepayments from clients. Examples of deferred revenue are rentals received in advance, prepayment receipts towards newspaper subscriptions, annual prepayment received for the use of software, and prepaid insurance.
Why it matters
Every business must appropriately record its assets and liabilities on its balance sheet. By adding deferred revenue on the liability side of the balance sheet, the company essentially avoids declaring unearned income in the asset. This prevents overvaluing the company's net worth.