Deferred Revenue

Money received from customers for products or services that have not yet been fully delivered, recorded as a liability on the balance sheet until the obligation is fulfilled.

Deferred revenue is a cash advantage with a future obligation. Founders who spend it before delivering the service risk being unable to fulfil commitments if the business faces difficulties. It must be managed carefully.

A founder sells annual subscription licences and receives £60,000 at the start of the year. Under accrual accounting, only £5,000 per month is recognised as earned revenue. The remainder sits as deferred revenue until the months of service are delivered.