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How Does Deferred Revenue Affect a Company?

Deferred revenue is a balance-sheet obligation that indicates an advance payment by customers for products or services that are yet to be delivered. Deferred revenue is essentially the money you get for a product or service that is not provided as promised at the time of purchase. Although the pleasure of receiving payment after a successful transaction is one of the best, there is still a huge difference between payment in hand and actual profit. As a result, this Marx Communications article explores the true worth of deferred revenue and how it may affect your business. According to the article, “deferred revenue” is obtained by a business when it gets an advance payment for products or services that will be supplied or performed in the future. It is also known as unearned revenue.

Deferred revenue affects companies

According to the article, deferred revenue is classified as a liability for two reasons. One, because it symbolizes unrealized money, and two, because it indicates that the corporation owes the consumer goods or services. This implies that the client may be able to cancel the order or that the product may not be delivered. Accordingly, revenue is recognized proportionally on the income statement as the product or service is given over time. Unless otherwise approved in writing, this might pose a problem for the company since the corporation becomes obligated to repay the customer. According to the article, contracts might mandate that no income be recorded until all services or items are provided. Deferred revenue is often shown on the income statement when a firm delivers services or products, according to the article. The article further explains aggressive accounting as quickly classifying deferred revenue as earned revenue or simply bypassing the deferred revenue account and adding revenue directly to the income statement. Finally, the article suggests that a company’s balance sheet and income statement be amended to account for any deferred revenue until the customer’s subscription terminates, i.e., when the company’s commitment to the client is terminated.

The notion of matching assets and liabilities is dependent on the accurate accounting of deferred revenue on a company’s balance sheet. The preceding material underlines the possible impact of deferred revenue on a firm.

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