Deferred revenue is the portion of a company’s revenue that has not been earned, but cash has been collected from customers in the form of a prepayment. Accrued expenses are the expenses of a company that have been incurred but not yet paid.
Under the revenue recognition principles of accrual accounting, revenue can only be recorded as earned in a period when all goods and services have been performed or delivered. If a company’s goods or services have not been performed or delivered, but a customer has paid for a future service or a future good, the revenue from that purchase can only be recorded as revenue in the period in which the good or service is performed or delivered.
In the case of a prepayment, a company’s good or service will be delivered or performed in a future period. The prepayment is recognized as a liability on the balance sheet in the form of deferred revenue. When the good or service is delivered or performed, the deferred revenue becomes earned revenue and moves from the balance sheet to the income statement.
Under the expense recognition principles of accrual accounting, expenses are recorded in the period in which they were incurred and not paid. If a company incurs an expense in one period but will not pay the expense until the following period, the expense is recorded as a liability on the company’s balance sheet in the form of an accrued expense. When the expense is paid, it reduces the accrued expense account on the balance sheet and also reduces the cash account on the balance sheet by the same amount. The expense is already reflected on the income statement in the period in which it was incurred.