For an online service (SaaS), Unearned Revenue, also known as Deferred Revenue, represents income that has been generated from the provision of services but has not yet been realized or received at the time it is recorded. It is included in the company’s financial statements to reflect the transactions that have taken place, even if the services have not been fully provided or delivered.
For example, if an online service company sells a monthly subscription to its services, it can recognize Unearned Revenue by recording the income generated from the subscription, even if the services have not been fully provided throughout the subscription period. This allows the company to reflect the revenue that has been generated from the subscription, even if the services have not been fully provided throughout the subscription period.
Concrete example: A customer subscribes to a €100 annual subscription on October 1st with Company A for an online service. By January 1st, the company may determine that 25% of the service has already been provided and therefore recognizes Unearned Revenue of €75. This represents the amount billed but not yet delivered.
It is important to note that Unearned Revenue should only be recognized when it is probable that it will be realized, and the amount of revenue associated with the Unearned Revenue can be reliably estimated.