Deferred revenue, commonly known as unearned revenue, refers to payments received ahead of time for products or services that will be supplied or rendered in the future. Accrued expenses are recorded on the books before they are cleared. For example, SaaS (software-as-a-service) companies that offer pre-paid memberships with services delivered over time will defer income over the contract’s life and use accrual accounting to show how the company is performing in the big scheme of things. This method highlights how much sales contribute to long-term growth and profitability.

Accrued revenue refers to goods or services you gave to a customer but have yet to be paid for. At the time of the transaction, accountants will usually record this revenue as “accounts receivable” on their balance sheet. This can (and frequently is) be done before monetary payment is received and usually before an invoice is raised.

When you record accumulated revenue, you recognize the income owed to you that still needs to be paid. 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.

There are numerous examples of when this accrual method of accounting is utilized to account for inbound revenue. Some common instances include

When you sell a product for $10,000 in one accounting period, but the invoice is paid after the end of the period, this is an example of revenue accrual. You would record the transaction by debiting accounts receivable and crediting revenue by $10,000. When the bill is paid, the entry is modified by deducting $10,000 from cash and crediting $10,000 from accounts receivable.

Deferred revenue is a balance-sheet obligation that receives an early payment because the company owes the client things or services. Companies that sell subscription-based products or services that need prepayments are the most likely to have deferred revenue. Rent payments given in advance, prepayment for newspaper subscriptions, annual prepayment for software use, and prepaid insurance are all examples of unearned revenue.

A company’s goods or services will be provided or performed in the future if a prepayment is made. The prepayment is recorded on the balance sheet as a liability in the form of deferred revenue. When the good or service is provided or performed, the deferred revenue is converted to earned revenue and is transferred from the balance sheet to the income statement.

Deferred revenue and deferral accounting are naturally suited to various business structures. Some common examples of deferred revenue we see daily are:

Assume a customer makes a $10,000 advance payment in January for products you’re driving to be delivered in April. You would record it as a $10,000 debit to cash and a $10,000 deferred revenue credit.
The receipt of payment has no bearing on when revenue is received using this method. When the products are delivered, deduct $10,000 from deferred revenue and credit $10,000 to earned revenue.

The primary differentiation between accrued and deferred accounting is when revenue or expenses are recorded. An accrual is an accounting transaction brought forward and recognized in the current period, even if the expense or revenue has not yet been paid or received. A deferral method delays payment until it is made or received.

Many organizations need to be set up to recognize accrued and deferred revenue as it occurs. Accrued revenue is typically ignored, while deferred revenue is recorded as regular revenue. Adjusting journal entries after a period as part of the closing procedure corrects both issues. As accrued revenue is discovered, it is recorded in the system.

Revenue accounts should be inspected to ensure that no deposits must be transferred to the liability account. To correct this issue, make a journal entry that debits or reduces regular revenue while crediting or increasing a deposit or other liabilities account.

However, when it comes to cash flows, there are distinctions between deferred and accrued revenues. Deferred income requires money to be received, whereas accrued revenue does not – cash may be collected in a few weeks, months, or even years. The revenue on an income statement does not imply that money was received. Cash may have arrived sooner or later.

Another thing to remember when dealing with deferred and accrued revenue is that these are not one-time activities. Once a deferral or accrual account has been charged, it must be cleared. These accounts are not static, and if you see that the numbers never change, there are most certainly problems that need to be fixed.