When a customer pays you before you deliver the good or service, debit Cash and credit Deferred Revenue — also called unearned revenue — which is a liability. Then, as you deliver, you move the balance out of the liability: debit Deferred Revenue and credit Revenue for the portion you have earned. The second entry is usually a month-end adjusting entry, repeated until the liability reaches zero.
Say a software company receives $5,940 on March 1 for a 12-month subscription. The customer has paid for a full year of service that the company has not delivered yet, so none of the $5,940 is revenue on March 1. The entry records the cash coming in and the obligation going up.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 1 | Cash | $5,940 | |
| Mar 1 | Deferred revenue (unearned revenue) | $5,940 |
Start with the accounting equation: assets = liabilities + equity. Cash, an asset, goes up by $5,940. Deferred revenue, a liability, also goes up by $5,940. The equation stays balanced without touching equity at all — which is exactly right, because the company has not earned anything yet.
The debit and credit sides follow from the normal balance rules. Assets increase with debits, so the $5,940 of new cash is a debit. Liabilities increase with credits, so the new obligation is a credit.
The part students find strange is that receiving cash creates a liability. It helps to be precise about what is owed. The company does not owe the customer $5,940 back — it owes twelve months of service. A liability is any obligation to deliver value in the future, and an obligation to deliver service counts just as much as an obligation to pay money. If the company shut down in June, it would have to refund the undelivered months, which is why auditors treat this balance seriously.
The reason revenue waits is the revenue recognition principle: under accrual accounting, revenue is recorded when it is earned, not when cash arrives. On March 1 the company has earned nothing, so crediting a revenue account on that date would overstate income for March and misstate every month after it.
Keep deferred revenue distinct from its mirror image, accrued revenue. Deferred revenue is cash before delivery — you hold the customer's money and owe the work, so the account is a liability. Accrued revenue is delivery before cash — you have done the work and are owed the money, so the account (usually accounts receivable) is an asset. Both exist for the same reason: accrual accounting separates the timing of cash from the timing of revenue. If you can say which came first, the cash or the delivery, you can name the account.
As each month of service passes, one-twelfth of the contract is earned: $5,940 ÷ 12 = $495. At the end of March, the company has delivered one month, so $495 stops being an obligation and becomes revenue. The adjusting entry moves it: debit Deferred Revenue to shrink the liability, credit Revenue to record what was earned.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 31 | Deferred revenue | $495 | |
| Mar 31 | Subscription revenue | $495 |
This same entry repeats at the end of every month through the following February. Each one moves $495 from the liability to revenue, and after the twelfth entry the deferred revenue balance for this contract is exactly zero. Notice that cash never appears in the adjusting entry — the cash was recorded once, on March 1, and it does not move again.
If you skip the adjusting entry, two things go wrong at once: liabilities are overstated and revenue is understated. Exam questions test this constantly, usually by asking what the effect of the omitted entry is on the financial statements. Work it from the entry itself — a missing debit to Deferred Revenue leaves the liability too high, and a missing credit to Revenue leaves net income too low.
Problems often give you a payment date and a year-end, and expect one adjusting entry covering the gap. Suppose a landscaping company collects $7,800 on November 1 for a 6-month contract, so $7,800 ÷ 6 = $1,300 per month. At the December 31 year-end, two months (November and December) have been earned: 2 × $1,300 = $2,600. The single adjusting entry debits Deferred Revenue $2,600 and credits Service Revenue $2,600, leaving a $5,200 liability for the four months still owed. The mechanics are identical to the monthly version — the only extra work is counting the months correctly.
If service starts mid-period, prorate. Had the subscription above started on March 16 instead of March 1, only half a month is earned by March 31: $495 ÷ 2 = $247.50. Some problems prorate by days instead of half-months, so read the convention the question states before computing. The entry's structure never changes — only the amount does.
The deferred revenue account tells you, at any date, how much service is still owed. After the June 30 adjusting entry, four monthly entries have posted (March through June): 4 × $495 = $1,980 recognized, leaving $5,940 − $1,980 = $3,960 as a current liability. By December 31, ten months have been earned and only $990 remains — the January and February service still to be delivered. If a question asks for the deferred revenue balance at some date, count the months delivered, multiply by the monthly amount, and subtract from the original payment.
Deferred revenue takes two entries: debit Cash and credit Deferred Revenue (a liability) when the customer pays, then debit Deferred Revenue and credit Revenue each period as you deliver. The liability shrinks as revenue grows, and the two always sum to the original payment.
When a customer pays in advance, debit Cash and credit Deferred Revenue for the full amount received. Deferred Revenue is a liability, so nothing hits the income statement yet. Revenue is recorded later, through a second entry, as the good or service is actually delivered.
Record it in two steps. On the day cash arrives, debit Cash and credit Deferred Revenue for the amount paid. Then at the end of each period in which you deliver, debit Deferred Revenue and credit Revenue for the portion earned — for a $5,940 annual subscription, that is $495 per month.
At period end, debit Deferred Revenue and credit Revenue for the amount earned during that period. The debit shrinks the liability; the credit records the revenue. For a 12-month contract, one month of the total is typically earned each period, so the adjusting entry moves one-twelfth of the balance.
Deferred revenue carries a credit balance because it is a liability. You credit it when the customer pays in advance, and you debit it each period as you earn the revenue. If your deferred revenue account ever shows a debit balance, something has been posted incorrectly.
Yes. Deferred revenue and unearned revenue are two names for the same liability account: cash a customer paid before you delivered. Textbooks often say unearned revenue; company financial statements more often say deferred revenue. The journal entries are identical either way.
By the FinanceBrain Team · Last verified July 10, 2026 · How we produce and verify articles