Accounting
Deferred Revenue
Cash collected before the work is delivered — a liability on the balance sheet that converts to revenue as you perform.
When a customer prepays — an annual SaaS subscription, a retainer, a deposit on a project — the cash is yours but the revenue isn't yet. Under accrual accounting and ASC 606, the prepayment sits on the balance sheet as deferred revenue (a liability: you owe the customer performance) and moves to the P&L as the service is delivered.
Deferred revenue is why 'cash in the bank' and 'profit' diverge so sharply for prepaid business models. A strong January of annual-plan sales looks like a windfall on a cash basis while most of it is actually next-twelve-months obligation.
In an acquisition, deferred revenue gets real scrutiny: the buyer inherits the obligation to deliver, so diligence teams treat a large deferred revenue balance as a debt-like item that reduces the price — and sloppy deferred-revenue records are one of the fastest ways to lose credibility in a sale process.
Common pitfalls
- Recognizing annual prepayments as revenue when the cash lands — overstates this year, understates next, and breaks any covenant or diligence analysis
- Spending deferred revenue as if it were earned — the delivery obligation still has costs coming
- Forgetting that cash-basis taxpayers generally pay tax on prepayments when received even though the books defer them — book and tax diverge here
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