Examples of Deferred Revenue in Different Industries
Deferred revenue refers to many cases and in many industries. Check out some of the examples.
#1 Software Subscription in SaaS
If a SaaS company sells an annual subscription for $120 to a customer in January, it would record the $120 as deferred revenue on its balance sheet. As each month passes and the company provides access to its software, it will recognize $10 of revenue each month, so by the end of the year, the entire $120 will have been recognized as revenue.
#2 Gift Cards in E-commerce
In the e-commerce sector, a popular example of deferred revenue arises with gift cards or vouchers. When a customer buys a $50 gift card, the e-commerce company records the $50 as deferred revenue on its balance sheet. As the customer redeems the gift card for purchases, the deferred revenue is gradually recognized as actual revenue.
#3 Customized Products in Manufacturing
In manufacturing, companies may receive advance payments for customized or made-to-order products. Suppose a machinery manufacturer collects $10,000 upfront to build a specialized machine. A customer pays $10,000, which is logged in the deferred revenue account. As the manufacturer progresses with the machine's production or delivery, portions of the deferred revenue are recognized as revenue.
#4 Magazine Subscriptions in Publishing
In the publishing industry, magazines frequently rely on deferred revenue from annual subscriptions. When a customer subscribes to a magazine for a year, the publisher records the subscription fee as deferred revenue. Each month, as the magazine is delivered to the subscriber, other parts of the deferred revenue are recognized as revenue on the income statement.
5 Best Practices for Managing Deferred Revenue
Now it's time for the best practices that will help you better manage your deferred revenue. We took into account, among other things, 5 areas:
1️⃣ Meticulously keep recording all transactions related to deferred revenue. Maintain clear documentation of contracts, subscription agreements, or sales orders that stipulate the terms and conditions. This will help in tracking the timing and amount of revenue that needs to be recognized.
2️⃣ Perform regular checks on your deferred revenue. As a result, you will identify any discrepancies or errors in the accounting process and ensure accurate financial reporting.
3️⃣ Stay updated and compliant with relevant accounting standards, which provide guidelines on revenue recognition. Understand the specific requirements for your industry and apply them correctly to your deferred revenue.
4️⃣ Establish effective communication channels between finance, sales, and customer service teams. Ensure that sales and customer service teams are aware of policies and timelines. Thanks to such collaboration, you will prevent misunderstandings and potential customer disputes.
5️⃣ Get help from specialists like Valueships. No matter if you have problems with understanding deferred revenue, you are not sure if implementing this service will be good for your business, or you simply want to get a hand with pricing strategies, our specialists will help and solve your problems. We work with many industries and have vast experience, so we are sure we can support you.
Take advantage of our strategy consulting services, and don't act blindly but on the basis of solid data and research. We will be happy to help you with this.
Understand Deferred Revenue and Run Your Business like a Pro
Deferred revenue, as one of the basic accounting concepts, allows companies to present their finances accurately. Understanding and properly managing it is necessary for any business.
If you want to enrich your strategies and make the right pricing and revenue decisions that will strengthen your company, don't hesitate to reach out to Valueships.
We are always at your service with our knowledge and experience.