Deferred revenue is a common term in the world of accounting and finance. It refers to money that a company has received for goods or services that have not yet been delivered. There are many different types of deferred revenue, but they all follow the same basic principles: if a company receives money from a customer before they've delivered goods or services, then the company will not recognize that revenue until later when it has delivered those goods or services.
A customer signs up to an annual contract with your SaaS company and is billed quarterly.
- In January they start their subscription and are billed $6,000 for the use of your service across the quarter.
- At the beginning of this month the deferred revenue is $6,000 as it has been paid by the customer but the service has not been delivered.
- At the start of February, the deferred revenue drops to $4,000 as you have recognised $2,000 of revenue for the use of the service in January.
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