Recording Deferred Revenue

What is deferred revenue?

When you record a sale or have a customer sign up for a subscription, you are entering into a contract with that customer to deliver goods or service in the future. This is the deferred revenue liability. Contrary to what the name implies, deferred revenue is not actual revenue yet.

When a customer initiates their order, the deferred revenue liability is created and an asset of accounts receivable is also recorded to reflect our expectation of future cash to be received. Because we have not fulfilled our obligation of merchandise such as an exercise machine or their first box in an annual subscription we have not yet earned any revenue.

If you're following Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) for accrual accounting, your first step is calculating and recording deferred revenue.