Bookkeeping · Reconciliation & Close · Brief · Working level
Deferred revenue: earning out customer prepayments
Money customers pay before you deliver is a liability, not income. The deferred revenue schedule and the monthly release entry that earns it out correctly.
When a customer pays for a year up front, you have their cash and they have your promise — which makes the payment a liability, not income. Deferred revenue (also called unearned revenue) is that liability, and the monthly release entry converts it to revenue at the pace you actually deliver. Book prepayments straight to revenue instead, and every strong sales month overstates income you have not yet earned — and borrows a hole in next year's numbers.
The two entries
At receipt of a 6,000.00 annual service contract paid up front on April 1:
| Account | Debit | Credit |
|---|---|---|
| Cash | 6,000.00 | |
| Deferred revenue | 6,000.00 |
No revenue line. The credit is a promise owed, sitting with the other liabilities.
At each month-end, April through March:
| Account | Debit | Credit |
|---|---|---|
| Deferred revenue | 500.00 | |
| Service revenue | 500.00 |
Straight-line for time-based services. Milestone or usage-based work releases by delivery instead — the schedule tracks whichever measure applies.
The schedule table
One row per prepayment, updated at every close:
The deferred revenue schedule as of June 30:
| Customer | Received | Total | Term (months) | Monthly | Earned to date | Remaining |
|---|---|---|---|---|---|---|
| Alder LLC (annual plan) | Apr 1 | 6,000.00 | 12 | 500.00 | 1,500.00 | 4,500.00 |
| Birch Co. (retainer) | May 15 | 3,000.00 | 6 | 500.00 | 750.00 | 2,250.00 |
| Cedar Inc. (annual plan) | Jun 1 | 2,400.00 | 12 | 200.00 | 200.00 | 2,200.00 |
| Total | 1,200.00 | 8,950.00 |
The control: the Remaining column's total must equal the deferred revenue balance in the ledger, every month. A ledger balance above the schedule means a prepayment came in without a schedule row; below it means revenue was released twice — often once by the schedule entry and once when someone also applied the customer's invoice to revenue. Mid-term amounts like Birch's half-month are fine; pick a convention (half-month or full-month in month one) and keep it.
Where it fits
Posting the releases and tying the schedule is step 7 of the month-end close checklist, alongside its mirror-image twin, the prepaid expense schedule — one machine earning out what you owe customers, the other releasing what vendors owe you. Both belong to the deferral family mapped in the adjusting entries guide.
Frequently asked questions
- What is deferred revenue?
- Deferred revenue is money received from customers for goods or services not yet delivered — an annual subscription paid up front, a retainer, a deposit on future work. Because you still owe the performance, it is a liability on the balance sheet, released to revenue month by month as you deliver.
- How do I record a customer prepayment?
- Debit cash and credit deferred revenue for the full amount at receipt — no revenue yet. Then each month, debit deferred revenue and credit revenue for the portion earned that month, following a schedule that tracks each prepayment's total, term, monthly release, and remaining balance.
- Is deferred revenue taxable when received?
- For cash-basis taxpayers, generally yes — advance payments are income when received. Accrual-basis taxpayers must include advance payments no later than the year after receipt under Section 451(c)'s one-year deferral election. Book treatment can defer over the full service period even when tax cannot; your accountant reconciles the difference.