Unearned Revenue vs Deferred Revenue
Unearned revenue and deferred revenue have the same meaning, albeit the difference in the choice of words. Both terms apply to the same accounting concepts and embody the same characteristics.
Both unearned revenue and deferred revenue are characterized as revenue or profit for a particular company that supplies goods or services, but they are listed as liabilities in the accounting books because the said income or revenue is considered as not yet earned or recognized. In this situation, there is a pending action or further transaction to be done before the income or profit is considered to be an asset.
Unearned or deferred revenue happens when payment for a particular good or service is given to the company who provides it but, at the same time, the company doesn’t provide the good or service at that particular time but at a later date. This portrays a one-way transaction at this specific time. Only after the good or service is supplied will the transaction be considered complete. At the same time, the company can list the payment as part of their revenue or income.
When deferred income occurs, there is an agreement between two parties (the company and the client) that the good or service will be given due to the advancement of income. The client expects to receive a service or good in the future, and the company is under obligation to fulfill its end of the bargain in providing the good or service before it can accredit the payment as part of its revenue. Deferred income, at the moment it is given to the company and at the point that the good or service is supplied, is listed as a liability in the accounting books.
Unearned or deferred income is usually used in Accrual Accounting. Deferred revenue can come in many forms, not just in the exchange of goods and services. Some employees who ask for a cash advance from their bosses or companies use the same principle. Other professionals like contractors, service professionals like plumbers and electricians, often ask for advance payment or a down payment first before the actual service begins. The advance can be used to finance some tools or anything necessary for the job. Some ask for deferred income first so that they have an assurance that the client will at least pay a part of their agreed compensation.
Deferred income also exists in subscriptions and memberships wherein the subscribers pay a certain amount of money in advance to receive goods or services (like licenses) from a particular company. The company, upon receiving payment, provides the subscriber with the goods or services depending on the duration or options that the subscriber indicated in the request.
One advantage with deferred revenue on the part of the company is that it receives income despite treating it as a liability. The income serves as a temporary resource if there is a shortage in cash flow. On the part of the client, deferred income is advantageous if the client wants a particular good or service in advance. For most people, paying forward gives the luxury of eliminating unwanted or unforeseen credit. Some people also want advance payments so they can budget their money better.
The disadvantage of this scheme is when the company fails to complete the transaction or the client feels that the company failed to provide the wanted good or service. There might be problems if there is no compromise between the client and the company to complete the transaction for both sides.
Summary:
1.Deferred and unearned revenue is the same accounting principle in Accrual Accounting. The main concept is that a payment is made in advance before a good or service is delivered or executed.
2.Deferred or unearned revenue is listed as a liability in the accounting books until the good or service is given to the client. After completing the transaction, the income shifts to the other side of the accounting column and is listed as an asset.