Glossary · Accounting
Deferred revenue
Also called Unearned revenue, Contract liability
Deferred revenue is money billed or received before the work is done. It is a liability until the service is delivered.
When a customer pays in advance — an annual subscription, a retainer, a deposit — the business owes them the service. Until it is delivered, the amount is recorded as a liability: deferred or unearned revenue, a contract liability under IFRS 15.
As the work is done, deferred revenue is released into revenue. A large deferred revenue balance is generally good news for cash: the customer has paid, and the risk of not being paid has gone.
Advance billing is one of the most effective ways to remove collection risk entirely, which is why retainers and annual prepayment are common in service businesses.
Example
A client pays €12,000 on 1 January for a year of support. On 31 March, €3,000 has been earned and €9,000 is still deferred revenue.