Deferred Revenue vs. Accrued Expense: What's the Difference? (2024)

FAQs

Deferred Revenue vs. Accrued Expense: What's the Difference? ›

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. Accrued expenses

Accrual: Accrual revenue is revenue that is earned, but has not yet been received (such as accounts payable). Deferral: Deferred revenue is revenue that is received, but not yet incurred (such as a deposit or pre-payment).

deferral adjustments are made after taxes and accrual adjustments are made before taxes.

Accrued revenues are revenues that are earned in one accounting period, but cash is not received until another accounting period. Accrued expenses are expenses that have been incurred in one accounting period but won't be paid until another accounting period.

Deferred revenue (also called unearned revenue) is essentially the opposite of accrued revenue. When revenue is deferred, the customer pays in advance for a product or service that has yet to be delivered.

Accrued expenses are expenses that a business incurs, but hasn't yet paid yet. For example, a company might receive goods or services and pay for them at a later time. It's a similar concept to buying something with a credit card.

Rent payments received in advance or annual subscription payments received at the beginning of the year are common examples of deferred revenue. Deferred expenses, similar to prepaid expenses, refer to expenses that have been paid but not yet incurred by the business.

Understanding Accrual vs Deferral Methods

For example, if a company delivers $10,000 worth of goods in December but is not paid until January, the $10,000 is recognized as revenue for December. Meanwhile, deferral accounting involves postponing the recognition of revenue or expenses until a later period.

For example, a company might provide consulting services to a client in December, but not issue an invoice until January of the following year. In this case, the company would record the revenue as “accrued” in December and recognize it as “received” in January, when the invoice is paid.

An accrual, or accrued expense, is a means of recording an expense that was incurred in one accounting period but not paid until a future accounting period. Accruals differ from Accounts Payable transactions in that an invoice is usually not yet received and entered into the system before the year end.

What is deferred revenue also known as? ›

Deferred revenue, which is also referred to as unearned revenue, is listed as a liability on the balance sheet because, under accrual accounting, the revenue recognition process has not been completed.

Recording deferred revenue means creating a debit to your assets and credit to your liabilities. As deferred revenue is recognized, it debits the deferred revenue account and credits your income statement.

When we talk about deferred revenue and expenses, both terms describe a delay between cost or sale and resulting payment. Deferred expenses are costs paid by a company that don't impact its accounts until later. Deferred revenue describes payments received by a company before it has delivered goods or services.

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

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.

Businesses and accountants record deferred revenue as a liability (a balance sheet credit entry) because it represents products and services you owe your customers—for example, an annual subscription for SaaS software, a retainer for legal services, or a hotel booking fee.