Deferred revenue
Deferred revenue is money a business has received but not yet earned, recorded as a liability until the service it pays for has been delivered.
Also called unearned revenue.
Unearned revenue is the same thing under a different name. Both describe cash collected ahead of performance, and both sit on the balance sheet as an obligation rather than on the income statement as revenue.
It becomes revenue as the obligation is satisfied. For an annual subscription billed up front that is straightforward and time-based. For prepaid credits it depends on consumption, which is why usage-based businesses cannot recognise revenue on a simple monthly schedule.
Common questions
- Is deferred revenue an asset or a liability?
Deferred revenue is a liability. The business holds cash it has not yet earned, and the obligation to deliver the service remains outstanding until performance is complete.
- What is the difference between deferred revenue and unearned revenue?
There is no difference. Deferred revenue and unearned revenue are two names for the same balance: money received before the related service has been delivered.
- What is the difference between deferred revenue and accounts receivable?
They are opposites. Accounts receivable is revenue that has been invoiced but not paid, recorded as an asset. Deferred revenue is cash that has been paid but not earned, recorded as a liability.
- How does deferred revenue become revenue?
Deferred revenue converts to recognised revenue as the performance obligation is satisfied. For a subscription billed annually in advance that happens evenly over the year; for prepaid credits it happens as the customer consumes them.