Deferred Revenue

Deferred revenue is a liability on a company's balance sheet that represents the portion of a customer's payment that has been received by the company but not yet earned through the performance of a service or delivery of a product. This is typically used by companies that offer subscription-based products or services, as it allows them to recognize revenue over the life of the subscription rather than all at once at the time of sale.

For example, a company that sells software as a service (SaaS) might receive a payment of $1,200 from a customer for a one-year subscription to the software. The company would recognize $100 of that payment as revenue each month, and the remaining $200 would be recorded as deferred revenue on the company's balance sheet. This deferred revenue would be recognized as revenue as the company performs the service and delivers the software to the customer over the course of the year.