Deferred revenue is money a business receives in advance for products or services it has yet to deliver.
In the SaaS industry, this typically occurs when customers pay upfront for subscription plans or long-term service agreements. Since the service hasn’t been provided yet, the payment is considered a liability on the company’s balance sheet rather than immediate income.
For example, if a SaaS platform charges an annual subscription fee at the start of the year, that payment counts as deferred revenue until the service is delivered month by month. This approach ensures financial records accurately reflect the company’s ongoing obligations.
Deferred Revenue vs Unearned Revenue
Deferred revenue and unearned revenue are often used interchangeably, but they describe the same accounting concept. Both terms refer to money received before delivering the promised goods or services.
Imagine a SaaS company offering cloud storage services with yearly subscriptions. When customers pay upfront, the company records that payment as deferred revenue. As each month passes, a portion of the revenue is recognized as earned because the service has been provided. This gradual recognition process ensures accurate financial reporting and compliance with accounting standards.
How Deferred Revenue Affects the Balance Sheet
Deferred revenue appears as a liability on the balance sheet because it represents an obligation to deliver services or products in the future. As services are provided, the company makes an adjusting entry, transferring amounts from deferred revenue to earned revenue on the income statement.
Maintaining accurate records of deferred revenue helps companies manage cash flow, forecast future earnings, and ensure adequate reserves for business operations. This practice is particularly important in SaaS, where long-term contracts are common. By properly handling deferred revenue, businesses can present a clear financial picture to investors, regulators, and stakeholders.
