Glossary · Financial statements
Deferred revenue
Deferred revenue is money a business has received for goods or services it has not yet delivered. It is recorded as a liability, because the business still owes the customer the work or a refund. As the work is delivered, the amount moves from the liability into revenue, period by period.
Glossary / Deferred revenue · Also called Unearned revenue, Unearned income, Revenue received in advance
How it works
Annual subscriptions, maintenance contracts, prepaid service plans, gift cards and tuition paid in advance all create deferred revenue. The cash arrives up front, but under accrual accounting the income belongs to the months in which it is earned.
Each month, the earned share is recognized: the liability goes down and revenue goes up. This keeps the profit and loss steady and honest. Without it, the month a big prepayment arrives looks hugely profitable and the following months look like losses.
A customer deposit for a single job is a close cousin. The difference is mostly timing: a deposit is applied when the job is invoiced, while deferred revenue is usually recognized in even slices over a service period.
Worked example: A 12-month service contract paid up front
On January 1 an IT company receives $6,000 for a 12-month support contract.
On January 1, cash and deferred revenue each rise by $6,000. At the end of each month, $500 moves from deferred revenue to revenue. By June 30, $3,000 has been recognized and $3,000 is still owed in service. By December 31 the liability is zero.
In the US and in Canada
In the United States
For US GAAP, revenue from contracts with customers is recognized under ASC 606 as performance obligations are satisfied. Tax rules on when advance payments are taxed can differ from book rules.
In Canada
Canadian private companies reporting under ASPE follow Section 3400 on revenue. For income tax, a reserve for goods or services to be delivered after year-end may be claimed in some cases.
In AcboBooks
AcboBooks has a revenue recognition screen that defers an amount received up front and recognizes it into income evenly over a number of months. Recognize due posts the earned portion up to today.
Related terms
Related on this site
Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
Get started
Books that get the terms right.
AcboBooks is desktop accounting for US and Canadian small businesses, bought once and kept on your own PC.
No card. No account. Nothing to cancel.