What it is: Deferred revenue, also known as unearned revenue or customer deposits, refers to money received by a company for products or services that have not yet been delivered. Under accrual-based accounting recognizes revenue once the company fulfills its obligations or delivers the promised goods or services.
Why it is essential: Deferred revenue is essential for accurately reporting a company's financial position. It represents an obligation to deliver goods or services in the future and is recognized as revenue when the performance obligation is fulfilled. Tracking deferred revenue helps assess the company's future revenue stream and provides insight into its financial health.
Formulas: There are no specific formulas associated with deferred revenue. It is typically recorded as a liability on the balance sheet and recognized as revenue when the related performance obligation is fulfilled.
How to use it in the context of startups: Startups can use deferred revenue to assess their future revenue pipeline and forecast cash flows. It is particularly relevant for subscription-based businesses that receive upfront customer payments but deliver goods or services over time. By correctly accounting for deferred revenue, startups can ensure accurate financial reporting and transparency with investors and stakeholders.
