Deferred revenue is money a business has received for goods or services it hasn't delivered yet. On an accrual basis, it is recorded as a liability, not income, because the business still owes the customer the work or a refund. As the work is delivered, the amount moves from the liability to revenue. A deposit taken before a program or job starts is a common example. For tax, the IRS says advance payments are generally income in the year received, but an accrual-method business can elect to defer qualifying amounts to the next tax year and no further.
What is deferred revenue?
It is money received early. The customer has paid, but you haven't delivered yet. Until you do, you owe them either the work or their money back. So on an accrual basis it is recorded as a liability, not as income. "Deferred revenue" and "unearned revenue" mean the same thing. Different businesses and accountants use different names.
How is it different from accounts receivable?
They are opposites:
| Paid first, delivered later | Delivered first, paid later | |
|---|---|---|
| Account | Deferred revenue | Accounts receivable |
| Type | Liability | Asset |
| What it means | You owe the customer work | The customer owes you money |
A payment plan can involve both. A deposit before a program starts is deferred revenue. Installments that fall due after the work has been delivered are receivables.
How is a deposit recorded?
A worked example. A customer pays a $1,500 deposit on September 15 for a program that starts October 1.
| Date | Debit | Credit |
|---|---|---|
| Sep 15, deposit received | Bank or Stripe clearing $1,500 | Deferred revenue $1,500 |
| As the program is delivered | Deferred revenue $1,500 | Revenue $1,500 |
On September 30 the balance sheet shows a $1,500 liability and the profit and loss shows nothing yet. The deposit becomes revenue as the program is delivered, on whatever schedule your accountant sets, such as month by month across the program.
When does deferred revenue become revenue?
When you deliver what the customer paid for. For a service delivered over time, such as a 12-month program, it is usually recognized in portions over the period of delivery. For a single event, it is recognized when the event happens. The exact method for your business is a question for your accountant.
How does the IRS treat advance payments?
Tax rules don't always match the books. IRS Publication 538 says:
- Generally, you report an advance payment for goods, services or other items as income in the year you receive it.
- If you use an accrual method, you can elect to postpone including the advance payment in income until the next year. You can't postpone any payment beyond that tax year.
- Under the cash method, you include in gross income all items you actually or constructively received during the tax year.
The deferral has eligibility rules, and changing to it requires Form 3115. Publication 538 also notes that some prepayments, such as some types of rent or insurance premiums, are excluded. Your CPA should decide how your deposits are treated for tax.
What happens if the customer cancels?
If you refund the deposit, the refund reduces the deferred revenue liability. Nothing was ever counted as revenue, so nothing has to be reversed. If your agreement lets you keep part of a deposit, recognizing that part as revenue is a question for your accountant.
Where does it sit in the chart of accounts?
Under liabilities, usually named "Deferred revenue," "Unearned revenue" or "Customer deposits." See chart of accounts.
General information, not accounting or tax advice.
Every figure on this page was checked against these sources on Oct 6, 2026. General information, not legal or tax advice.