Accounting

Imgage source: www.LearningVideo.com via Flickr.

What is the difference between deferred revenue and unearned revenue? Well, the short answer is that both terms mean the same thing -- that a business has been paid for goods or services it hasn't provided yet. Here's a more thorough description of deferred and unearned revenue, as well as a few examples to illustrate it.

What is deferred/unearned revenue?
Deferred and unearned revenue are accounting terms that both refer to revenue received by a company for goods or services that haven't been provided yet. In the company's books, deferred/unearned revenue (henceforth referred to solely as deferred revenue) is classified as revenue/profit, but is listed as a liability on the balance sheet until the goods have been delivered, or services have been performed.

In other words, deferred revenue requires some action on the part of the company before it can be considered an asset. If, for whatever reason, the company is unable to deliver the goods or services as promised, the deferred revenue must be refunded.

It's also important to note that deferred revenue can be used to finance expenses necessary to complete the job.

Examples
An excellent example of a business that deals with deferred revenue is one that sells subscriptions. For example, if I purchase a one-year subscription to a weekly stock-market newsletter, and receive the first issue immediately, the company must count most of the money I paid as deferred revenue, because it still owes me another 51 issues. Gradually, that revenue will shift from a liability to an asset as the company fulfills its obligations.

Service providers are another example of businesses that typically deal with deferred revenue. For example, when you hire a contractor to renovate your house, the contractor generally wants at least some of the money up front. That money should be accounted for as deferred revenue until the job is complete -- although the contractor can certainly use it to buy supplies to complete the job.

Other examples could include, but are not limited to

  • Legal retainers
  • Rent paid in advance
  • Insurance (prepaid)
  • Selling tickets (airline, concerts, sporting events, etc.)
  • Deposits placed for future services
  • Service contracts

The bottom line
Deferred or unearned revenue is an important accounting concept, as it helps to ensure that the assets and liabilities on a balance sheet are accurately reported. It makes perfectly clear to shareholders and other involved parties that the company still has outstanding obligations before all of its revenue can be considered assets.

To learn more about investing, check out our broker center.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at knowledgecenter@fool.com. Thanks -- and Fool on!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.