What is Deferred Revenue
Revenue recognition’s core principle states that an entity should only record revenue when it has been earned, not when the related invoice has been posted or related cash has been collected.
Deferred revenue in accrual accounting is rooted in the matching principle. When you invoice a company for a one-year subscription, you have not earned that revenue yet. You earn it over the term of the subscription. Therefore, you must “park” the revenue on the balance sheet.
Deferred revenue is a payment from a customer for future goods or services. The seller records this payment as a liability, because it has not yet been earned.
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Additional SaaS Resources
Learn more about SaaS deferred revenue at The SaaS CFO.