Unearned revenue is money a customer has paid for goods or services you haven't delivered yet. It is the same thing as deferred revenue. On an accrual basis, it is a liability on the balance sheet until you deliver, then it moves to revenue. If a customer prepays $12,000 for a 12-month program, $1,000 is earned each month and the rest stays a liability. For tax, the IRS says advance payments are generally income in the year received, though an accrual-method business can elect to defer qualifying amounts to the next tax year and no further.
What is unearned revenue?
It is payment for work you still owe. A customer paid you, but the service hasn't been delivered or the goods haven't shipped. The money is yours to hold, but on an accrual basis it isn't income yet. If you never delivered, you would owe it back. That makes it a liability.
Is unearned revenue the same as deferred revenue?
Yes. Both terms describe the same liability. See deferred revenue for how deposits are recorded and how it compares with accounts receivable.
How does unearned revenue turn into revenue?
As you deliver. A worked example. A customer pays $12,000 on September 25 for a 12-month program that runs October through September and is delivered evenly.
| Date | Debit | Credit |
|---|---|---|
| Sep 25, payment received | Bank or Stripe clearing $12,000 | Unearned revenue $12,000 |
| Oct 31, first month delivered | Unearned revenue $1,000 | Revenue $1,000 |
| Nov 30, second month | Unearned revenue $1,000 | Revenue $1,000 |
| Dec 31, third month | Unearned revenue $1,000 | Revenue $1,000 |
After three months, $3,000 has been earned and $9,000 is still a liability. By the end of the program the liability is zero and all $12,000 is revenue. If the program isn't delivered evenly, the monthly amounts follow how it is actually delivered. Your accountant decides the method.
What about a payment plan instead of a prepayment?
It usually works the other way round. On a plan, the customer typically pays a deposit and then pays over time while the work is delivered. Only money received ahead of delivery is unearned. When delivery runs ahead of payment, the amount still owed is accounts receivable. A program can move between the two over its life, depending on which is ahead.
Why does it matter?
- Profit isn't overstated. Counting a year's prepayment as income in the month it arrives makes that month look far better than it was, and later months worse.
- Refunds are covered. The liability shows what you would owe if customers withdrew or cancelled.
- Lenders and buyers look at it. A large unearned balance means work still to deliver with cash already received.
How does the IRS treat it?
IRS Publication 538 says you generally report an advance payment for goods or services as income in the year you receive it. If you use an accrual method, you can elect to postpone including it in income until the next year, but not beyond that tax year. Qualifying for the deferral has conditions, and adopting it requires Form 3115. A cash-method business includes income when it is actually or constructively received. So the books and the tax return can treat the same prepayment differently. Your CPA should decide the tax side.
Where does it go in the books?
Under liabilities, in an account named "Unearned revenue," "Deferred revenue" or "Customer deposits." Use one name across all your entities so their reports compare.
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.