How to Correctly Prepare Deferred Revenue Journal Entries

What are deferred revenue journal entries?

Any time your company receives payment for future goods or services, this is deferred revenue. You might also know it as unearned revenue. The deferred revenue journal entry is your tracking mechanism for this type of revenue, within your accounting.

If you are using accrual-based accounting, revenue is only recognized when it is earned. This means that deferred revenue is a liability account showing your obligation to your customer. When your company delivers the goods or services, the journal entry becomes real revenue.

Deferred revenue is part of the overall revenue recognition principle within the accrual method of accounting. It goes along with other methods of recording revenue as it is recognized, such as deposits, prepayments, and retainers. Some other examples of deferred revenue that your business might encounter include subscription-based services and memberships.

Deferred revenue is common for service businesses, but there are sometimes situations in which goods require deferred revenue, such as deposits for large orders.

What are deferred revenue journal entries in bookkeeping?

Given that a journal entry in accounting works to record business transactions, a deferred revenue journal entry is a recording of revenue not yet earned. 

This typically occurs when a company receives payment for products or services in advance of delivering them. In bookkeeping, you need to record deferred revenue as a liability on your balance sheet because the company owes the customer a product or service.

Is deferred revenue a credit or a debit?

Recording deferred revenue means creating a debit to your assets and credit to your liabilities. As deferred revenue is recognized, it debits the deferred revenue account and credits your income statement.

Is deferred revenue an asset or a liability?

Because deferred revenue indicates goods or services you owe to your customers, it is a liability. It’s important to know that if the good or service is not delivered, even if it was planned, your company may owe the money back. Recording deferred revenue as a liability, instead of an asset, recognizes that there is always a risk that the product or service is not delivered.

If that does happen, your business needs to compensate the customer in most cases, which is why you should not count that revenue as an asset until it is realized. 

How is deferred revenue recorded?

Deferred revenue is recorded on a company’s balance sheet as a liability. This represents money that has been received in advance from customers for products or services that the company has not yet delivered or earned. These journal entries ensure that the company reflects the revenue on the income statement when it is actually earned, adhering to the matching principle in accounting. By recording deferred revenue as a liability, it signifies the company’s obligation to provide goods or services in the future and represents a deferred income that will be recognized over time as the products or services are delivered.

Is deferred revenue on a cash flow statement?

Deferred revenue can be recorded on the cash flow statement, noted as deferred revenue. Even if you have not earned it yet, it is still money that can be spent. Of course, you will want to be sure that you can fulfill your obligations to your customer.

Where does deferred revenue go on the balance sheet?

Deferred revenue is listed as a liability on the balance sheet. When it is recognized (because your company has delivered), it is proportionally recorded as revenue on your income statement. 

How to log deferred revenue journal entries

How to create a deferred revenue journal entry

Under accrual accounting, financial transactions are recorded as and when they occur. This means that when you create a deferred revenue journal entry, you only log revenue for what has been delivered. If, for example, a customer pays $1000 in advance for two months of service, and you’ve only delivered one month, only $500 would be recorded as revenue. The credit/debit aspects of this are outlined above.

Examples of deferred revenue journal entries

A simple example of a deferred revenue journal entry could look like this. We will use the example of a $1200 subscription spread out across one year.

Date Account Notes Debit Credit
Payment for subscription
Deferred Revenue

On a monthly basis, the recordings would look like this.

Date Account Notes Debit Credit
Deferred Revenue
One month of subscription

How to enter deferred revenue in Quickbooks

In Quickbooks, record deferred revenue under the ‘other current liability’ option. Set up products and services, and edit income account to deferred revenue. As you deliver, move items from deferred revenue and credit them as income under the appropriate account.

Can you debit AR and credit deferred revenue?

Accounts receivable, or AR, represents income from products and services delivered but for which payment has not been received. In other words, AR is credited when revenue is earned but not received, and as money is realized AR is debited and cash balance credited. While deferred revenue is classified as a liability, accounts receivable is an asset on the balance sheet until payment is actually received.

Other frequently asked questions about deferred revenue journal entries

How is deferred revenue treated for tax purposes?

The accrual method of accounting is acceptable to the Internal Revenue Service. Taxpayers can defer recognition until the time when advance payments are reported as revenue in the applicable financial statement. Deferred revenue allows businesses to reflect their revenues as they occur, so accounting is more accurate, and revenue is better matched to expenses. This can also help reduce taxes by reducing net income. Generally accepted accounting principles call for accurately calculating and reflecting revenue, expenses, and other information so that financial statements are of the highest quality possible.

What if deferred revenue is negative?

Negative deferred revenue on a balance sheet is usually a sign that something is off in your calculations, or your classifications. That would imply that the company has paid the customer, which means that the amount would be a receivable, as a negative liability is an asset.

Why is deferred revenue shown as a liability?

Deferred revenue is shown as a liability because it reflects an obligation to provide goods or services in the future, and until that obligation is fulfilled, the company holds that money on behalf of its customers.

It is a liability on a company’s balance sheet because it represents money that has been received for goods or services that have not yet been provided to the customer. Essentially, it’s like a promise or obligation to deliver something in the future.

From an accounting perspective, recording deferred revenue as a liability is necessary to accurately represent the financial position of the company. It ensures that the company acknowledges its obligation to fulfill the goods or services paid for by the customer in the future. As the services are provided over time, the deferred revenue is gradually recognized as revenue on the income statement, thus reducing the liability over time.

How to get help with deferred revenue journal entries

Managing accrual based accounting and deferred revenue can get complicated, whether your business is small or dealing with a large volume of transactions. Finvisor will help you with any aspect of accounting, from monthly bookkeeping to complex oversight. As your on-demand CFO, we work to understand your unique challenges and qualities, and create solutions that work.

To learn more about what we do, or to request a quote, contact us at or 415-416-6682. We’re here to help you navigate deferred revenue journal entries so you can make the most of your assets!

*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*

If you are looking for a simple and straightforward excel template to help you recognize deferred revenue properly on a monthly basis click here to download our template that links directly to your account system’s GL output.

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