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Deferred Revenue - how to explain
Answers
The accounting explanation, cut the the basics works well. Use the concept KISS or in other words, Think Accounting 101, not graduate school.
"If you get paid for a product or services you did not deliver, then its deferred revenue. What makes it strange is that deferred revenue is a liability account (because you owe the customer the product or services). Once the services or product is delivered, deferred revenue is decreased and revenue (sales) increases, because you now have a real sale!"
This is a simplified example that your Board can understand.
Deferred revenue = customer prepayments for services not yet rendered or goods not yet delivered.
The "good" is that you have use of the cash in advance and the related revenue recognition is generally predictable.
Jeff...I feel your pain. It is hard for us
Revenue is what you earn when you have delivered the goods and/or services you agreed to provide. If your delivery takes place over an extended period of time, or in multiple parts, then your revenue number must be prorated based on what you have delivered. Think annual subscription revenue spread over 12 months.
Cash is what you collect from the customer based on agreed payment terms, e.g. pay annually upfront, pay monthly in advance or in arrears. Cash flow can therefore differ from revenue flow.
I like to think of it as a short "loan" from the customer as well. I think it puts it into better perspective for people who aren't accountants instead of just saying a liability.