Unearned Revenue
Definition
Unearned revenue (also called deferred 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 upfront for a one-year service. Each month, $100 moves from unearned revenue to revenue as the service is delivered.
Why It Matters
Recording unearned revenue as revenue overstates income. The business owes the customer something until the revenue is earned.