Deferred Revenue
Also called: unearned revenue, deferred income
What is Deferred Revenue?
Deferred revenue is an amount a business has collected for goods or services it has not yet delivered. It sits as a liability until the delivery happens, at which point it becomes revenue in the accounts.
Why cash received is not always revenue
Under accrual accounting, revenue is recognised when the business does what it was paid for, not when the money lands. An annual maintenance contract billed in April is earned across twelve months; a block of ten sessions is earned one session at a time; a deposit on an order is earned when the order ships. Until then the business is holding someone else's money against a promise.
How it unwinds
Each delivery moves a slice of the balance from liability to income. If a business collected ₹60,000 for a year of service in April, roughly ₹5,000 becomes revenue each month and the liability falls by the same amount, reaching zero at the end of the term. Nothing changes in the bank account during that time, which is exactly why the two figures have to be tracked separately.
Where small businesses get caught
Counting the full collection as income in the month it arrives inflates that month and empties the next, which makes trend-reading impossible and can overstate tax position. The opposite error — keeping the money in a liability long after the work was done — understates profit and leaves a balance nobody can explain. Both are easy to avoid with a list of open commitments and a monthly line to release what was earned.
Frequently asked questions
Under current liabilities on the balance sheet, because it represents an obligation to deliver rather than value earned. It moves to the profit and loss statement as revenue only as the goods or services are supplied.