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Deferred revenue, also called unearned revenue or customer deposits, is money that you received for products or services you haven’t delivered yet. With accrual-based accounting, you don’t recognize the revenue until you’ve fulfilled your side of the transaction.
For example, if you have a subscription service, your customers might pay you for the upcoming month’s services on the first of the month. You collect the money and consider it a billing on the first. But the amount remains deferred revenue and current liability because you owe the customer the services. If the customer had prepaid for the year, you might recognize one month’s worth at the end of each month.
Recognizing your revenue at the correct time is important for complying with generally accepted accounting principles (GAAP).
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