Startup Accounting
Deferred Revenue Explained
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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What Deferred Revenue Is and How It Is Created
- Deferred revenue (also called unearned revenue) is a liability that arises when your company receives cash from a customer before delivering the promised service.
- When a SaaS customer pays $12,000 upfront for an annual subscription, the full amount is recorded as deferred revenue on day one, not as revenue on the income statement.
- Each month, as you deliver the service, you recognize $1,000 of revenue and reduce the deferred revenue liability by the same amount.
- This treatment follows the accrual accounting principle and ASC 606, which requires revenue to be recognized when performance obligations are satisfied, not when cash is received.
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