How-to · Adjusting entries
How to record deferred revenue
When a customer pays before you deliver, record the money as deferred revenue, a liability: debit the bank and credit Deferred Revenue. As you deliver each month, move that month's share from Deferred Revenue into income.
How-to guides / Deferred revenue
The accounting behind it
Revenue is earned when you deliver, not when you are paid. Until then, you owe the customer the service or a refund, so the money is a liability. This is deferred revenue, also called unearned revenue.
Each month you deliver, the liability goes down and income goes up by the same amount. At the end of the term the liability is zero and the full amount is income.
A one-off deposit on a job is handled the same way in principle; for project deposits see the post on customer deposits.
| Account | Debit | Credit |
|---|---|---|
| Bank | Amount received | |
| Deferred Revenue (liability) | Amount received |
| Account | Debit | Credit |
|---|---|---|
| Deferred Revenue | Monthly share | |
| Income | Monthly share |
Worked example: a $1,200 annual support plan
A customer pays $1,200.00 on April 1 for 12 months of support. You earn $100.00 a month. At your December 31 year-end, nine months ($900.00) are income and $300.00 is still deferred.
| Account | Debit | Credit |
|---|---|---|
| Checking | $1,200.00 | |
| Deferred Revenue | $1,200.00 |
| Account | Debit | Credit |
|---|---|---|
| Deferred Revenue | $100.00 | |
| Service Income | $100.00 |
Common mistakes
- Recording the full payment as income in the month received.
- Recording it once as income on an invoice and again through a deferral schedule.
- Forgetting sales tax or GST/HST, which is usually due when you invoice or are paid, not as you recognize the income.
- Leaving deferred revenue on the books after the service period ends.
In the US and in Canada
United States
For tax, an accrual-method business may elect to defer part of an advance payment to the next tax year, but no further (IRC section 451(c) and Treasury Regulation 1.451-8, described in IRS Publication 538). The books can spread it over the full service period even when tax recognizes it faster.
Canada
Under paragraph 12(1)(a) of the Income Tax Act, amounts received for services not yet rendered or goods not yet delivered are included in income, and paragraph 20(1)(m) lets you deduct a reasonable reserve for the part not yet earned. The effect is close to the bookkeeping treatment.
In AcboBooks
AcboBooks 0.2.1 has a Revenue Recognition screen that books the upfront amount to Deferred Revenue and recognizes it evenly by month.
- Open the screen. Go to Accountant → Revenue Recognition.
- Create the schedule. Enter a Description, the Total, the number of Months, the Start date, the Income account and (optionally) the Customer, then click Create. AcboBooks records the amount received into your bank and Deferred Revenue (it creates that account if missing).
- Recognize each month. Click Recognize due now once a month, for example during your month-end close. It moves every month that has started into income, dated the day you click.
Create records the money as received into the first bank account in your Chart of Accounts, so use it instead of an invoice or sales receipt for that amount, not as well as one. If you have already recorded the payment another way, use a monthly journal entry from Deferred Revenue to income instead.
Menu names are from AcboBooks 0.2.1. Not using it yet? Try it free for 15 days, with the sample company to practise on.
Questions
Is deferred revenue an asset or a liability?
A liability. You owe the customer the service until you deliver it.
When does deferred revenue become income?
As you deliver the goods or services, usually in equal monthly amounts over the term.
What's the difference between deferred revenue and accrued revenue?
Deferred revenue is cash received before it is earned. Accrued revenue is earned before it is billed or paid.
Related how-to guides
- How to record a gift card sale
- How to record a prepaid expense
- How to record a security deposit received
Terms used here
Sources
Updated October 25, 2026. General bookkeeping information, not tax, legal or accounting advice. Rules differ by state and province and change over time; check with the IRS, the CRA or your accountant for your own situation.
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