Deferred Revenue Under ASC 606 & GAAP: Guide & Examples (2024)

FAQs

What is the ASC 606 deferred revenue? ›

ASC 606 Revenue Recognition: Deferred Revenue Concept

In other words, the performance obligation of the company has not yet been met. The cash payment collected from the customer was received in advance because the company is obligated to provide a specified benefit to the customer on a future date.

In contrast, GAAP requires deferred revenue to be recognised when the company has earned the revenue, which means that the customer has received the goods or services and the company has satisfied its performance obligations. For software and tech companies, these two standards are effectively the same.

Deferred revenue is money received in advance for products or services that are going to be performed in the future. Rent payments received in advance or annual subscription payments received at the beginning of the year are common examples of deferred revenue.

This means that when you create a deferred revenue journal entry, you only log revenue for what has been delivered. If, for example, a customer pays $1000 in advance for two months of service, and you've only delivered one month, only $500 would be recorded as revenue.

What does ASC 606 stand for? ASC 606 means Accounting Standards Codification and is an accounting standard defined by the Financial Accounting Standards Board (FASB) that outlines how to recognize revenue arising from contracts from customers.

Deferred revenue affects three key financial statements – the balance sheet, income statement, and cash flow statement.

Deferred revenues are generally valued using a bottom-up approach, where the costs needed to fulfill the performance obligation are added to an appropriate profit margin.

Generally accepted accounting principles require that revenues are recognized according to the revenue recognition principle, which is a feature of accrual accounting. This means that revenue is recognized on the income statement in the period when realized and earned—not necessarily when cash is received.

Deferred revenue, also known as unearned revenue, refers to advance payments a company receives for products or services that are to be delivered or performed in the future. The company that receives the prepayment records the amount as deferred revenue, a liability on its balance sheet.

How to reconcile deferred revenue? ›

Reconcile Beginning to Ending Balance

This method provides a reconciliation of starting Deferred Revenue balance to ending balance. The basic formula for calculating the ending balance is: Starting Balance + New Fees +/- Net Adjustments - Recognized Revenue = Ending Balance.

Deferred revenue, a component of accrual accounting, aligns with GAAP principles, providing a conservative and transparent approach to financial reporting. Unlike cash accounting, deferred revenue recognizes income in line with service delivery rather than when cash payments are received.

Deferred revenue is applicable anytime a customer makes an advance payment for goods or services that will be delivered at a future date. Rent payments and retainers are two common examples of prepayments that constitute deferred income for a small business or other organization.

Deferred revenue can impact your tax liability depending on the tax regulations in your jurisdiction. Generally, you won't owe taxes on that deferred revenue until you've actually earned it. It's a nice perk that offers some leeway for planning and resource allocation.

Terms like “deferred revenue” can confuse non-accountants, but the concept is easy enough. Deferred revenue means that when customers pay upfront for products or services, they will receive later, your accountant recognizes that income over time rather than all at once.

Buyers prefer to treat deferred revenue as debt, reasoning that it is a liability for goods/services to be provided post-closing. In the course of negotiations, sellers and buyers will need to consider, for example, whether the deferred revenue was established by the receipt of cash or booking of a trade receivable.

Deferred revenue is recognized as a liability on the balance sheet of a company that receives an advance payment. This is because it has an obligation to the customer in the form of the products or services owed.

Deferred revenue is recorded as income you've received, but haven't yet earned by providing goods or services. Once those have been provided, deferred revenue is then recognised as earned revenue.