Definition
Deferred revenue is money a business has received, or invoiced, for goods or services it has not yet delivered. Because the business still owes the work, deferred revenue is recorded as a liability on the balance sheet and moved to revenue as the work is performed. It is common with subscriptions, retainers, and deposits.
Also called: Unearned revenue, Customer deposits, Contract liability
Deferred revenue in practice
Deferred revenue reflects an obligation, not a gain. If the customer cancels before delivery, you may have to return the money, which is why accountants treat it as a liability until earned.
Each period, an adjusting entry moves the earned portion from deferred revenue to revenue. For a 12-month prepaid contract, one-twelfth moves each month.
Tracking deferred revenue gives an honest picture of performance. A business with large upfront payments can look very profitable in the month it is paid if it does not defer the revenue properly.
Example
A consultant receives a $6,000 retainer on March 1 for three months of work. She records $6,000 of deferred revenue, then recognizes $2,000 as revenue at the end of each month.
Frequently Asked Questions
Is deferred revenue an asset or a liability?
A liability. The business has received payment but still owes the customer goods or services. As it delivers, the liability decreases and revenue increases.
Is a deposit deferred revenue?
Yes, for accrual-basis businesses. A client deposit for future work is deferred revenue until the work is done, at which point it is recognized as revenue.
Related terms
- Revenue recognition Revenue recognition is the accounting principle that decides when income is recorded in a business's books.
- Accrued revenue Accrued revenue is income a business has earned by delivering goods or services but has not yet invoiced.
- Deposit A deposit is a partial payment made before work begins or goods are delivered, typically 25 to 50 percent of the total.
- Retainer A retainer is a recurring fee a client pays to reserve a professional's availability or to prepay for a set amount of work each period.
- Billing in advance Billing in advance means invoicing a client before the service period begins, so payment arrives at or before the time the work is delivered.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.