Deferred revenue: cash received before it is earned
A promise on the balance sheet
Try the interactive lessonLet’s make it simple.
A payment received before a service is delivered creates deferred revenue: a liability representing a promise to the customer. Revenue is recognized as the service is delivered.
Picture this.
A customer pays $600 for six months of lessons. At first, debit Cash $600 and credit Deferred Revenue $600. Each month, debit Deferred Revenue $100 and credit Revenue $100.
Check your understanding
A customer prepays $600 for six equal months of lessons. You deliver one month. How much revenue do you recognize now?
Think it through, then reveal the explanation
$600 ÷ 6 = $100. Debit Deferred Revenue and credit Revenue by $100. The remaining $500 is still a liability until future lessons are delivered.
Build the bigger picture.
- Receive the customer prepayment
- Record cash and deferred revenue
- Deliver one month of service
- Reduce deferred revenue and recognize revenue
Receiving cash creates a promise. Delivering service fulfills that promise.
Now make it move.
Bring this idea to life with interactive practice, a 3D illustration and tips along the way. Your progress stays on your device.
Practice Cash Now, Revenue Later