For instance, suppose you sell something in March but don’t get paid until May. You would record the revenue produced in March and the payment received in March to offset the entry. For example, if a business pays out a performance bonus annually and one of their employees has been smashing goals every month, the bonuses are adding up. With each month, a business can record the performance bonuses as a liability on their balance sheet to accurately record what they’ll need to pay out at the end of the period. Stripe offers features such as the revenue waterfall chart, which provides a breakdown of deferred revenue vs accrued revenue recognized versus deferred revenue on a month-by-month basis.

Understanding Deferred Revenue

No matter the strategy, accurately capturing both accrued and deferred revenues can at times be complicated — particularly when dealing with any delinquent payments. That’s why many organizations rely on automated A/R collection platforms to streamline the tracking and reporting of these unrealized payments. At its most basic level, the biggest difference between accrued revenue vs. deferred revenue is a matter of timing. We take a deeper look at understanding accrued vs. deferred revenue and what those differences might mean for a business. Accrued income is recorded as a short-term asset under accounts receivable in the balance sheet of a business. Contrarily, deferred or unearned income is received in advance before providing goods or services.

1. A debit entry increases it whenever goods or services are delivered and the payment is accrued.
2. Therefore, the total accrued revenue must match the total of goods delivered or services offered at project completion.
3. In the end, the proficient handling of these revenue types can lead to more accurate financial statements, thereby benefiting the overall strategic decision-making of the business.
4. In either case, the seller would need to refund either all or part of the purchase unless a signed contract states otherwise.

Assets vs. Revenue: What’s the Difference?

Deferred revenue is classified as a liability, in part, to make sure your financial records don’t overstate the value of your business. A SaaS (software as a service) business that collects an annual subscription fee up front hasn’t done the hard work of retaining that business all year round. Classifying that upfront subscription revenue as “deferred” helps keep businesses honest about how much they’re really worth. It’s featured on your balance sheet as a liability, and anyone evaluating the financial health of your business—investors, financial analysts, or potential acquirers—will look at this line item. A high amount of deferred revenue might indicate strong customer commitment and loyalty, but it might also suggest a lot of deliverables are pending. The absence of accrued revenue may present excessively low initial revenue and low-profit levels for a business, which does not indicate the true picture of the entity.

Deferred Revenue vs Accrued Revenue: Key Differences

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You shouldn’t spend it the same way you spend regular cash

Since deferred revenue represents cash that customers pay for services that haven’t been delivered, it means the company now holds that cash. If a company sells a good or service that provides an ongoing benefit to the customer, it’ll likely record at least some of the customer’s up-front payment as deferred revenue. Companies selling subscriptions, insurance, or items with down payments are all examples of businesses that may record deferred revenue.

Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation. Here are some common questions and answers concerning accruals and deferrals. With Taxfyle, your firm can access licensed CPAs and EAs who can prepare and review tax returns for your clients.

Deferred revenue can be set to automatically reverse in basic accounting information systems. Though a company will have to monitor the monthly activity, this frees up analysts time to scrub their financial reports. Due to its short-term nature, deferred revenue is often expected to satisfy within the next year. Let us look at a detailed example of the accounting entries a company makes when deferred revenue is created and then reversed or earned.