Definition
When a customer pays for a year up front, you owe them a year of service. That obligation sits on the balance sheet as deferred revenue and is recognized as revenue month by month.
Formula
Unearned revenueClosing deferred revenue = Opening + Billings − Revenue recognized
Example
A $120,000 annual prepay on January 1 creates $110,000 of deferred revenue at the end of January, falling by $10,000 each month.
Benchmarks
Growing deferred revenue is usually a good sign of strong annual billings. The key test is that the roll-forward ties every month.
Common mistakes
- Recognizing the whole prepay as revenue when it is billed.
- A roll-forward that doesn’t tie, usually a sign of misbooked invoices.
Examples use Demo Co, a fictional $3M ARR SaaS company, or a generic company where noted. Benchmarks are common reference points, not targets for every business.