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Deferred Revenue

Deferred revenue is money invoiced (and usually collected) for service you have not yet delivered — a customer's annual prepayment sits here and is released to revenue month by month. On the balance sheet it is a liability, because you still owe the service.

Formula

Deferred revenue balance = amounts billed − revenue recognised to date

Worked example

A customer pays $24,000 for a year in January. You recognise $2,000 of revenue each month; after four months, $8,000 has been earned and $16,000 remains as deferred revenue.

For subscription businesses deferred revenue is a happy liability: growth in the balance means customers are prepaying faster than you deliver, which is why growing SaaS companies can be cash-rich while showing accounting losses.

Analysts watch the change in deferred revenue as a proxy for billings momentum. A shrinking balance at a "growing" company suggests shorter prepayment terms or slowing sales — worth a question either way.

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