Deferred Revenue
Cash received from customers before a company has delivered the corresponding goods or services.
What is Deferred Revenue?
Deferred revenue, also called unearned revenue, is a liability on the balance sheet representing money a company has collected from customers but not yet earned by delivering products or services. Under accrual accounting and ASC 606 revenue recognition rules, revenue can only be recognized once performance obligations are satisfied. Common examples include annual software subscriptions, prepaid insurance premiums, and gift cards. As the company fulfills its obligations, deferred revenue converts into recognized revenue on the income statement. A growing deferred revenue balance is often a bullish signal, indicating strong advance bookings and predictable future revenue.
Example
Microsoft collects payment upfront for multi-year Azure and Microsoft 365 subscriptions. As of June 2024, it reported $62 billion in deferred revenue — an indicator of strong committed future revenue that will be recognized as cloud services are delivered over the subscription period.