What is Deferred Revenue?
Nexa Consultancy | Startup & Finance Glossary
Deferred Revenue (also known as unearned revenue) is a liability on a company's balance sheet that represents cash received from customers for products or services that have not yet been delivered. It is a core concept in accrual accounting, particularly for subscription-based businesses.
For Startups: For a SaaS startup, deferred revenue is a crucial metric. When a customer pays upfront for an annual subscription, the entire amount is initially recorded as deferred revenue. As the service is provided each month, a portion of this deferred revenue is converted into recognized revenue on the income statement. A growing deferred revenue balance is a strong indicator of future revenue growth.
Example: A SaaS company receives ₹1,20,000 on January 1st for a one-year contract. The full amount is added to deferred revenue. Each month, it recognizes ₹10,000 as revenue and reduces the deferred revenue balance by the same amount.