Deferred Revenue

Deferred revenue is a very important concept in accounting. There are some standard accounting rules and regulations with the help of which we keep a note of it. So, in the next few paragraphs, let us acquaint ourselves with the concept of deferred revenue.

The Concept of Deferred Revenue

Deferred revenue is actually a liability account in which you will be collecting cash and payments from your clients before you have actually delivered the products to them. So, it is actually an advance which you get from your clients and this is mostly given considering your past performance and company reputation in the market. The companies can use this type of revenue received from the clients to meet their immediate financial needs. Such revenue cannot be included in assets by a company as the payment would have to be returned in case the company is not successful in supplying the goods or services as decided with the party. So, it would become an asset such as cash in hand only when the goods are finally delivered to your client.

Many examples of deferred revenue can be given from our day-to-day lives. The best one can be of the monetary relationship between the landowner and the tenant. Many times, there is an agreement between the owner of a home and the tenant and as per the agreement, the tenant makes a yearly payment for getting the space on rent for a year. When you sign such an agreement, you are liable to give him the living space for a year. So, the amount you receive from him will be your final money earned only after the completion of a year and hence it is the deferred revenue.

For the conversion of deferred revenue into an asset, the organization should have great efficiency and professionalism to meet the deadlines. They should make sure that their client gets the services or products he desires at the right time and in good quality. The client would be checking the quality of goods you provide and make payments accordingly. In case you deliver poor quality goods, you will be losing your market reputation and trust which would itself be a big setback. Proper business management, business development and understanding in the team members is a must for converting the deferred revenue, which is initially a liability for the organization, into an asset. At this point, you should also be aware of the generally accepted accounting principles.

Understanding this concept is quite easy and hopefully, by now you must have understood its importance in the business world and normal life. While you accept money from someone before delivering the products, you have to be careful and honor your commitments and prove your worth. This will help you earn respect and get more and more clients. A rising client base means rising profits and more happiness! So, think over it and take the right decision. All the best!