Deferred revenue

Deferred revenue is a payment from a customer for future goods or services. The seller records this payment as a liability, because it has not yet been earned. Deferred revenue is common among software and insurance providers, who require up-front payments in exchange for service periods that may last for many months.

Deferred Revenue Recognition

As the recipient earns revenue over time, it reduces the balance in the deferred revenue account (with a debit) and increases the balance in the revenue account (with a credit). Depending on the contract terms, the selling entity may not be allowed to recognize revenue until all goods have been delivered and/or services completed; this can skew the reported performance of a business to show early losses, followed by profits in later periods.

The deferred revenue account is normally classified as a current liability on the balance sheet. It can be classified as a long-term liability if performance is not expected within the next 12 months.

Deferred Revenue Accounting

For example, Alpha Corporation hires Northern Plowing to plow its parking lot, and pays $5,000 in advance, so that Northern will give the company first plowing priority throughout the winter months. At the time of payment, Northern has not yet earned the revenue, so it records all $5,000 in a deferred revenue account, using this deferred revenue journal entry:

  Debit Credit
Cash 5,000  
     Deferred revenue (liability)   5,000

Northern expects to be plowing for Alpha for a period of five months, so it elects to recognize $1,000 of the deferred revenue per month in each of the five months. For example, in the first of the five months, Northern records the following entry:

  Debit Credit
Deferred revenue (liability) 1,000  
     Plowing revenue (revenue)   1,000

Similar Terms

Deferred revenue is also known as prepaid revenue or unearned revenue.

Related Courses

Bookkeeping Guidebook 
How to Audit Revenue 
Revenue Recognition