Deferred revenue

Meaning

Deferred revenue (الإيرادات المؤجلة) arises when a customer pays before the business performs: a yearly software subscription paid up front, a deposit on an order, a maintenance contract billed in advance. The cash is in the bank but the revenue is not yet earned, so the receipt credits a liability, and each month the earned portion is moved to revenue. Recognising it all on receipt overstates profit and understates what is still owed to the customer in service.

VAT does not wait: VAT is due at the earliest of supply, invoice and payment, so an advance received is invoiced and the VAT paid in that period even though the revenue is deferred in the books. That difference between the VAT return and the income statement is normal and should be reconciled, not corrected.

Also called: unearned revenue · advance from customers · الإيرادات المؤجلة

Example

A customer pays Al Noor 12,000.00 plus VAT on 1 October for a twelve-month support contract. Al Noor issues the tax invoice, pays the 1,800.00 VAT in its October return, and books 12,000.00 as deferred revenue; each month 1,000.00 moves to revenue, so October's income statement shows 1,000.00 and the balance sheet 11,000.00 still owed in service.