Deferred revenue FAQs
Why is deferred revenue considered a liability?
Businesses and accountants record deferred revenue as a liability (a balance sheet credit entry) because it represents products and services you owe your customers—for example, an annual subscription for SaaS software, a retainer for legal services, or a hotel booking fee.
What is the difference between deferred revenue and unearned revenue?
There is no difference between unearned revenue and deferred revenue because they both refer to advance payments a business receives for its products or services it's yet to deliver or perform. Thus, they are items on a balance sheet you initially enter as a liability (an obligation to fulfill in the future) but later become an asset.
Is deferred revenue a good or bad thing?
Deferred revenue is neither a good nor a bad thing. So perhaps the correct answer would be that it depends—mostly on a business's revenue recognition tracking systems that correctly track and assign pre-payments as either deferred (unearned) revenue or recognized revenue.
Is deferred revenue a debit or credit in accounting?
Since deferred revenue is a liability until you deliver the products or services per the booking agreement, you will make an initial credit entry on the right side of the balance sheet under current liability (if the sale is under 12 months) or long-term liability. Then, as you earn revenue over time, you will debit the deferred revenue account and credit the revenue account.