How to Account For Deferred Revenue

How to Account For Deferred Revenue

Knowing how to handle deferred revenue is an important part of the accountant's job. Cash paid to a company for goods or services not yet rendered must be treated as deferred revenue; it cannot be recognized upon cash receipt. By familiarizing yourself with the principles that underpin accrual accounting, you can quickly learn how to account for deferred revenue properly.


  1. Familiarize yourself with what deferred revenue is. Revenue that is deferred is also called unearned revenue, for precisely that reason it hasn't been earned yet. For example, if you run an insurance company, and a client pays you in January for insurance coverage for the whole year, that payment would have to be treated as a deferred revenue. Because you haven't actually provided the insurance coverage yet, you haven't earned the money for it.
  2. Understand why you need to defer revenue. Why can't you just record the revenue when you actually receive the cash payment? The answer is that this would violate the principles of accrual-based accounting. There are 2 principles which provide the foundation for accrual accounting.
    • The first is the matching principle. Under the matching principle, revenues and expenses that correspond to each other must be recorded in the same accounting period. Using the insurance example above, you cannot recognize all the revenue in January, because there will be expenses associated with that insurance coverage incurred throughout the year. These expenses must be matched with their corresponding revenues.
    • The second is the revenue recognition principle. This principle dictates that revenues should only be recorded when they are both realized (or realizable) and earned. "Realized" revenues are those for which a claim to cash has been received, and "earned" revenues are those for which a good or service has been rendered.
    • The implication, then, is that you cannot simply record a revenue whenever cash is paid to your company. If, for example, a client is prepaying for a continuing service, then you cannot recognize that payment as revenue until you actually render the service. Until then, the payment represents a liability, or an obligation to the client.
  3. Determine the revenue that needs to be deferred. Continuing with the example above, imagine your client pays you $12,000 on January 1 for insurance coverage for the entire year (note that these calculations will work equally well in other currencies). As of January 1, you haven't provided them with a single day's worth of coverage. So, all of the revenue will have to be deferred.
  4. Make the appropriate journal entry to record the cash receipt. In the example above, you would debit Cash for $12,000 and credit Unearned Revenue for $12,000. The Unearned Revenue account is a liability account, so it will appear along with the Cash account on the balance sheet. As of right now, the income statement has not been affected.
  5. Make an adjusting entry to record the revenue as earned. Assuming your firm uses the month as its accounting period, consider the adjusting entry needed on January 31. The first month of insurance coverage has now been rendered, and therefore the revenue has been earned. You should now debit Unearned Revenue (a balance sheet account) for $1,000, and credit Service Revenue (an income statement account) for $1,000.
  6. Make the appropriate closing entries. Remember, the Service Revenue account must be closed at the end of the accounting period, because it is a temporary account. Transfer its balance to the Income Summary account, and then when all revenue and expense accounts have been closed, transfer Income Summary's balance to Retained Earnings.
  7. Continue making adjusting entries to recognize the revenue until it has all been recognized. In the example above, the final adjusting entry will be made on December 31, which will again debit Unearned Revenue for $1,000 and credit Service Revenue for $1,000. The Unearned Revenue account will have a balance of $0 at this point.


  • While accrual-based accounting is handled similarly in different countries, the exact process taken to defer revenues will vary based on each country's reporting standards. The examples above are consistent with U.S. Generally Accepted Accounting Standards (GAAP).

Things You'll Need

  • Accounting software

Sources and Citations
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  1. Very informative article, thank you

  2. This is not an easy task handle deferred revenue some time you have to hire the relevant staff.I appreciate you to discuss this . Every accounting system uses journals that record deferred items, and there generally two major categories of deferrals deferred expenses and deferred income or more