You have deferred revenue when you receive payment for goods services that you have not yet delivered or completed.
Simply put, deferred revenue = invoicing > revenue
If you use accrual accounting and only recognize earned revenue, you would record prepayments as a liability on your balance sheet. Corporate Finance Institute provides great examples of deferred revenue on a balance sheet.
You also need to track your performance obligations to decide when to recognize your deferred revenue. For example, your promised goods and services, such as the right to use your software to accomplish a task (ex: payroll, expenses, social, etc).
Performance obligations are explicitly stated in your contract and may include something not stated but common in your business processes. This makes it important to know and track stated promises your business practices.
Many industries may have deferred revenue. Bottom line (no pun intended), they all must meet the same GAAP and ASC 606 revenue recognition requirements.
For example, if you have a subscription-based business model, or a Software/SaaS business, you likely have a variety of subscription or usage billing scenarios and thus a complex revenue recognition schedule. Many SaaS companies chose to automate their revenue recognition process to properly record deferred revenue to meet ASC 606 requirements, ensure billing and invoicing are automatically updated with contract changes, and to keep their SaaS metrics reflecting real-time data.
Professional Services Organizations may also have deferred revenue. Unless your Professional Services Firm strictly contracts on time and materials, you may need to account for deferred revenue. If you bill for a project, and have yet to fully complete the work, you have deferred revenue. If your firm uses pre-payments, managed services, subscriptions and even fix-fee and milestone invoicing, you may have to account for deferred revenue and ensure you are ASC 606 compliant.
Tracking may involve a deferred revenue waterfall. It reconciles your deferred revenue account balance on your balance sheet and provides a forecast of your expected revenue stream in the future.
Sage Intacct provides a compliance framework to help you automate revenue recognition, properly record deferred revenue, and navigate other accounting and financial management requirements for the following industries:
- Accountants and CPA Firms
- Biotech and Life Sciences Companies
- Construction and Real Estate Companies
- Financial Services Companies
- Healthcare Companies
- Companies in the Hospitality and Restaurant Industries
- Professional Services Organizations
- Software, Subscription Business Model, and SaaS Companies