Liability created when a business receives cash before it has earned the related revenue.
Deferred revenue is the liability created when a business receives cash before it has earned the related revenue. Until the promised goods or services are delivered, the amount is not earned income yet.
Deferred revenue keeps businesses from overstating revenue just because cash arrived early. It is a core companion concept to revenue recognition and often appears in subscription, service-contract, software, and advance-payment models.
When the customer prepays, accountants debit cash and credit deferred revenue. As the business performs, delivers, or lets time pass under the contract, the liability is reduced and revenue is recognized.
This means the balance sheet carries the obligation first, while the income statement reflects revenue only as the obligation is satisfied.
A customer prepays 12,000 for a 12-month service contract:
At receipt:
| Account | Debit | Credit |
|---|---|---|
| Cash | 12,000 | |
| Deferred Revenue | 12,000 |
After one month of service:
| Account | Debit | Credit |
|---|---|---|
| Deferred Revenue | 1,000 | |
| Revenue | 1,000 |
Deferred revenue is not passive-income “unearned income.” On this site, the concept refers to customer prepayments that are liabilities until performance occurs.