What is deferred revenue?

Deferred revenue consists of payments made in advance of the service. While your business has a commitment from the customer to pay and has sent a customer invoice, services have not been rendered and/or products have not been delivered.

How to calculate deferred revenue

Deferred revenue example

EXAMPLE: for an annual subscription paid all at once:

• On January 1, you sell a customer and their subscription immediately starts. They commit to a 1-year contract for $12,000 to be paid all at once. You immediately invoice them.
• On January 1, your deferred revenue is $12,000.
• On February 1, your deferred revenue is $11,000 after recognizing $1,000 of revenue in January.

EXAMPLE: for an annual subscription billed quarterly:

• On January 1, you sell a customer and their subscription immediately starts. They commit to a 1-year contract for $12,000 to be paid quarterly. You immediately invoice them $3,000 for the first quarter.
• On January 1, your deferred revenue is $3,000.
• On February 1, your deferred revenue is $2,000 after recognizing $1,000 of revenue in January.