What is deferred revenue?
Deferred revenue consists of payments made in advance of the service. While your business has a commitment from the customer to pay and has sent a customer invoice, services have not been rendered and/or products have not been delivered.
How to calculate deferred revenue
Deferred revenue example
EXAMPLE: for an annual subscription paid all at once:
- On January 1, you sell a customer and their subscription immediately starts. They commit to a 1-year contract for $12,000 to be paid all at once. You immediately invoice them.
- On January 1, your deferred revenue is $12,000.
- On February 1, your deferred revenue is $11,000 after recognizing $1,000 of revenue in January.
EXAMPLE: for an annual subscription billed quarterly:
- On January 1, you sell a customer and their subscription immediately starts. They commit to a 1-year contract for $12,000 to be paid quarterly. You immediately invoice them $3,000 for the first quarter.
- On January 1, your deferred revenue is $3,000.
- On February 1, your deferred revenue is $2,000 after recognizing $1,000 of revenue in January.