Glossary

Deferred revenue (unearned revenue)

Definition

Deferred revenue, also called unearned revenue or a contract liability, is cash received from customers before the business delivers the goods or services. It is recorded as a liability because the business still owes performance, and it is released to revenue as each obligation is fulfilled, for example month by month over an annual subscription.

How it works

Deferred revenue is common in subscriptions, maintenance contracts, gift cards, event tickets and customer deposits. Recording the cash straight to revenue would overstate profit in the month of receipt and leave nothing to match the costs of the later months.

It follows the accrual basis: revenue is earned by performance, not by payment. If the business cannot deliver, the customer may be entitled to a refund, which is why the balance stays a liability until the work is done.

Example: an annual software subscription

A customer pays 2,400 on 1 July for a 12-month subscription. The company credits deferred revenue 2,400 and each month moves 200 to revenue. At 31 December, 1,200 has been earned and 1,200 remains as a liability.

Example: an annual software subscription
Date	Account	Debit	Credit
1 July	Bank	2,400
1 July	Deferred revenue		2,400
31 July	Deferred revenue	200
31 July	Subscription revenue		200

Related terms

Revenue
Revenue is the income a business earns from its ordinary activities, such as selling goods or providing services, measured at the amount it expects to be entitled to. Under the accrual basis it is recognised when control passes to the customer, not when cash arrives.
Liabilities
Liabilities are present obligations of a business to transfer cash or other resources because of past events, such as supplier invoices, loans, taxes payable and customer advances. They have a credit normal balance.
Accrual basis
Under the accrual basis, revenue is recorded when it is earned and expenses when they are incurred, whatever the date of payment. IFRS and US GAAP statements are prepared on this basis.
Adjusting entry
An adjusting entry is recorded at the end of a period to bring balances up to date, for example accrued expenses, prepaid amounts or depreciation. It makes the statements follow the accrual basis.
Prepaid expense
A prepaid expense is a payment made in advance for goods or services the business will receive in future periods, such as annual insurance or rent paid up front. It starts as an asset and is expensed as the period it covers passes.

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FAQ

Questions about Deferred revenue (unearned revenue)

Is deferred revenue an asset or a liability?

A liability. The business has received cash but still owes goods or services to the customer.

Is a customer deposit deferred revenue?

Yes, as long as it will be applied to a future sale. Refundable security deposits are a separate liability, not future revenue.

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