What is deferred revenue?
When a customer pays upfront, such as an annual software subscription, a deposit or a gift card, the business hasn't earned the money yet. It owes the customer the product or service. Until it delivers, the amount sits on the [balance sheet](/glossary/balance-sheet) as a liability.
How it works
- Cash received: debit bank, credit deferred revenue.
- As the service is delivered: debit deferred revenue, credit revenue.
This follows revenue recognition](/glossary/revenue-recognition) rules under [IFRS 15 and ASC 606.
Example
A customer pays $1,200 on 1 January for a 12-month subscription. On day one, deferred revenue is $1,200. Each month, $100 moves to revenue. By 30 June, revenue recognised is $600 and deferred revenue is $600.
Common examples
- SaaS and membership subscriptions
- Annual maintenance or support contracts
- Customer deposits and advance payments
- Gift cards and vouchers
- Event tickets sold in advance
Deferred revenue vs accrued income
Deferred revenue is cash before earning (a liability). [Accrued income](/glossary/accrued-income) is earning before billing or cash (an asset).
Why it matters
It stops businesses from overstating revenue and shows future work owed to customers. For subscription businesses, a growing deferred revenue balance is often a positive sign of future revenue.