What is Deferred Revenue on a Balance Sheet?

The Deferred Revenue section appears under current liabilities on a Balance Sheet. Deferred Revenue represents revenue that is usually received in advance for future goods and services.

Discussion:

Deferred Revenue is revenue that is not yet recognized as the goods and services have not been provided. Unearned revenue or customer deposits are common names for this liability.

Under the accrual basis of accounting, revenues are recorded as soon as the product has been sold or a service is provided. It does not matter when the cash is received as cash can be received in advance or at a later date in most circumstances. For example, if a corporation provides consulting services at an agreed price of $1,000, it should recognize this revenue as soon as the work is performed. If the cash was not received until after the fiscal year, then there would be an accrual set up as a receivable and revenue would be recorded. If cash is received in advance, the payment is recorded as a deferred revenue liability and not as revenue. Once the work has been performed, the payment will be reallocated from the liability account to revenue.

There are some criteria for determining when revenue is recognized:

• When risks or rewards are transferred from seller to purchaser
• Seller no longer has control over goods or services that have been completed
• Collection of payment can be reasonably assured
• When amount of revenue can be reasonably measured

The Canadian accounting standards for private enterprises (ASPE) Section 3400 has more details on how to recognize revenue.

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