Deferred Revenue is when a customer pays for services or goods in advance. They work has not been performed, but will be done a later date that is set by the business owner and customer.
Since the company has received payment, but has not done the work. The cash received is a liability on the balance sheet under deferred revenue.
The cash in deferred revenue is recorded as a sale only after the work has been done. The amount would be deducted from deferred revenue on the balance sheet and recorded as a sale in the profit and lost statement for the month that the work was done.
This helps keep sales accurate for company that received payments earlier than expected.
An issue with deferred revenue can be that you spend the money before doing the work. If the customer decided to cancel the service or good. The money would need to be paid back and if the money is already spent. This can cause cash flow issue in the business operation.
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