What Is Deferred Revenue?
Deferred revenue, also known as unearned revenue, is money your business receives in advance for products or services you have not yet delivered.
Think of it like this: a client pays you today for a service you’ll perform next month. That payment is not yet considered earned. From an accounting perspective, it’s a liability—not income—because you still owe the client that service.
Common Examples:
– An event planner receives a 50% deposit upfront for a wedding in six months.
– A subscription box company collects a full year’s payment from a customer in January.
– A bookkeeper is paid in advance for a quarterly clean-up project they haven’t started yet.
All of these payments are considered deferred revenue—until the product is shipped or the service is rendered.
Why It’s a Liability, Not Income
In accrual accounting, revenue is only recognized when it’s earned, not when cash changes hands. Until then, deferred revenue sits on your balance sheet as a liability—because your business now owes goods or services to someone.
If you book that cash as revenue immediately, you might inflate your income, pay taxes prematurely, or make decisions based on inaccurate financial data.
How Deferred Revenue Impacts Your Financials
Let’s say you received $10,000 in January for a project you’ll complete in April. If you use cash basis accounting, it might look like you earned $10,000 in January—even though the work hasn’t started.
With accrual accounting, that $10,000 is entered as deferred revenue in January. Then, as you complete the project in April, that amount is gradually moved from deferred revenue (liability) to revenue (income).
Benefits of tracking deferred revenue properly:
– Cleaner cash flow forecasting
– Accurate income reports
– Proper tax timing
– Better audit readiness
Deferred Revenue in QuickBooks
If you’re using QuickBooks Online, handling deferred revenue correctly requires a few setup steps:
1. Create a Deferred Revenue Liability Account
2. Use a Sales Receipt or Invoice Linked to the Liability
3. Recognize Revenue Over Time
It’s a bit of work, but it ensures your books stay accurate and clean.
What Happens If You Ignore It?
Ignoring deferred revenue can distort your business performance:
– Overstated Revenue
– Tax Trouble
– Mismatched Expenses and Revenue
When to Recognize Deferred Revenue
Revenue should be recognized when:
– A service is fully delivered
– A product is shipped
– A contractual milestone is reached
If your work spans multiple months, consider recognizing revenue in phases.
Who Needs to Care About This?
If you:
– Accept deposits or prepayments
– Offer retainers
– Run a subscription-based service
– Deliver work over multiple months
– Sell event tickets
…then deferred revenue absolutely applies to you.
Deferred Revenue and Tax Considerations
While your books might be on accrual, your taxes might still be filed on a cash basis. If so, you may still be taxed on prepayments even if the revenue is deferred in your accounting system.
The IRS has specific rules around prepaid income. That’s why it’s crucial to work with your bookkeeper to align reporting with your tax strategy.
Let SkyBridge Help
At SkyBridge Bookkeeping, we help businesses make sense of things like deferred revenue. We’ll set up your accounting system to track these transactions accurately—and help you avoid costly errors.
Final Thoughts
Deferred revenue isn’t just an accounting technicality—it’s a window into your business’s health and operations.
If you’re getting paid in advance, now is the perfect time to get your systems in place.
Need help setting up deferred revenue in QuickBooks or staying compliant with revenue recognition rules? Contact SkyBridge Bookkeeping today.
