Deferred Revenue

What is deferred revenue?

Deferred revenue is money you've received but haven't yet earned. When a client pays a deposit before work begins, that deposit is deferred revenue—you have the cash, but you haven't delivered what they paid for. It becomes earned revenue only when you complete the work or deliver the goods.

Deferred revenue is considered a liability because you owe the client either the work or a refund.

Deferred revenue examples

Common situations involving deferred revenue:

• Project deposits — Upfront payments before work starts
• Retainers — Ongoing payments for future services
• Prepaid contracts — Full payment received before service delivery
• Gift certificates — Payment for services to be provided later
• Annual subscriptions — Full year paid upfront but delivered monthly

Accounting for deferred revenue

In accrual accounting, you record the cash received but don't count it as revenue until you've earned it. As you complete work, you move amounts from deferred revenue to earned revenue. This prevents overstating your income before you've actually delivered.