Accounting technology / Glossary / Deferred revenue

What is deferred revenue?

Definition

Deferred revenue is money a business has billed or received for goods or services it has not yet delivered. Because the business still owes the customer that delivery, it is recorded as a liability on the balance sheet and moved into revenue as the work is done, such as month by month over an annual software subscription.

Also calledunearned revenuecontract liabilitydeferred income

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Shown as: Liability on the balance sheet
ASC 606 / IFRS 15 name: Contract liability
Released: As goods or services are delivered

How deferred revenue works

Take a customer that pays 12,000 upfront for a twelve-month subscription. On invoicing, the company debits receivables or cash and credits deferred revenue for 12,000. Each month it moves 1,000 from deferred revenue to revenue. After six months, 6,000 has been recognised and 6,000 remains a liability. Under ASC 606 and IFRS 15 the balance is called a contract liability, and its opposite, revenue earned but not yet billed, is a contract asset. Deferred revenue matters most in subscription, software and service businesses, where cash often arrives well before revenue. Revenue recognition software builds the schedules from contracts and posts the monthly release, and the balance is reconciled to the schedule at each close.

Common questions

Is deferred revenue a liability or an asset?+

A liability. The business has the cash or receivable but still owes the customer the product or service. It becomes revenue only as that obligation is fulfilled.

What is the difference between deferred revenue and accrued revenue?+

Deferred revenue is billed before it is earned. Accrued revenue, or a contract asset, is earned before it is billed. One is a liability, the other an asset.

Does deferred revenue affect cash flow?+

Upfront billing brings cash in before revenue is recognised, so a growing deferred revenue balance increases operating cash flow compared with profit.