Deferred Revenue
Definition
Deferred revenue (also called unearned revenue) is money received before the business has earned it. It is a liability until the work is completed or the product is delivered.
Example
A customer pays $1,200 for a one-year software subscription upfront. Each month, $100 is moved from deferred revenue to revenue as the service is delivered.
Why It Matters
Recording deferred revenue correctly prevents overstating income. The business owes the customer something until the revenue is earned.