Deferred Revenue

Deferred Revenue, also called Unearned Revenue, is a balance sheet account that represents the liability associated with the delivery of a SaaS product as required by contract. For an individual contract, Deferred Revenue is equal to all of the revenue expected to be recognized over the period defined by the invoice. Enterprise SaaS companies typically require upfront annual payment for new or renewal contracts. On the date an invoice is issued, the SaaS company records the value of the invoice as Deferred Revenue and books the same amount to Accounts Receivable: debit Accounts Receivable and credit Deferred Revenue. When the customer pays the invoice amount, the company credits Accounts Receivable and debits Cash. Receipt of payment does not affect Deferred Revenue. Assuming that the invoice is for an annual term, the company records revenue in each month the revenue is earned. Therefore, the company will debit Deferred Revenue by 1/12th of the invoice amount and credit Subscription Revenue by the same amount.

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