Unearned Revenue

Beginner

Also known as: Deferred Revenue

Unearned revenue is money a business has received from customers for goods or services it has not yet delivered. It is recorded as a liability until the work is done.

When a customer pays in advance, the business owes them something: either the goods or service, or a refund. Until it delivers, the payment is a liability, not revenue.

Subscriptions, annual memberships, advance ticket sales, gift cards and deposits are typical examples. As the business delivers over time, it moves the money from the liability account into revenue.

Suppose a gym sells a twelve-month membership for 600, paid upfront. On the day of sale, it records cash of 600 and unearned revenue of 600. Each month, 50 is moved from unearned revenue to revenue as the member uses the gym. After twelve months, all 600 has been recognised as revenue and the liability is gone.

A growing unearned revenue balance can be a positive sign, because it shows customers committing money for future services. Software and subscription companies often watch it closely as an indicator of future revenue.

Note: Unearned revenue is also called deferred revenue. The two terms mean the same thing; "deferred revenue" is more common in company reports.

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