Skip to main content
Book a free consultation

Accounting encyclopedia · Bookkeeping

Deferred revenue

Deferred revenue is money a customer has paid before the business has delivered the goods or services, such as a deposit, a retainer or an annual subscription. Under accrual accounting it is generally recorded as a liability when received and moves into revenue as the work is delivered or the subscription period passes.

Sora Accounting & Tax · General information · Editorial policy
Updated · 3 min read

Prepayment starts as a liability and becomes revenue

Money received before delivery is held as a liability and released into revenue as the product or service is delivered.

Visual labels: Customer pays in advance; Liability recorded; Work delivered; Revenue recognized.

Cash received is not the same as income earned

When a customer pays in advance, the bank balance rises but the business still owes something: the product, the service or a refund. Recording the full amount as revenue on the day it arrives overstates that period’s results and understates what is still owed. Bookkeepers instead record a liability, often called deferred or unearned revenue, and release it into revenue as the obligation is met.

This follows the same logic as accrual reporting generally. The Canada Revenue Agency explains that on the accrual method, income belongs to the fiscal period in which it is earned, regardless of when the money actually arrives. Whether a particular deposit counts as earned for tax purposes depends on the contract and the facts, so treat the accounting view here as a starting point for a conversation, not a tax conclusion.

Retainers, deposits and subscriptions

A customer deposit on a custom order, a retainer paid to a service provider and a twelve-month software subscription billed upfront all create deferred revenue. They differ in how it is released. A deposit may be recognized when the item is delivered. A retainer is usually recognized as hours are worked. A subscription is usually spread across the months covered.

The contract matters. Refundable deposits, milestone payments and cancellation terms change what the business has actually earned, so keep signed agreements and delivery records with the accounting file.

An illustrative example

Suppose a business with a December 31 year-end invoices a client $12,000 on October 1 for a twelve-month service, and the client pays that day. Roughly three of the twelve months fall in the current year, so about $3,000 is earned by year-end and about $9,000 remains deferred revenue, shown as a current liability on the balance sheet. The following year the remaining $9,000 is released into revenue as the service is delivered.

The numbers are illustrative only and ignore sales tax. If you instead counted the whole $12,000 as income in the first year, that year would look more profitable than the work performed justifies and the next year would look weaker.

Why it matters for cash and for questions to ask

A large deferred revenue balance means customers have funded work you still have to do. The cash may already be spent on payroll or supplies, which is one way a business can look healthy in the bank while carrying obligations. BDC lists items such as payroll and sales taxes collected among current liabilities, and deferred revenue sits in the same group of obligations to review.

Bring contracts, invoices, payment dates and a note of what has been delivered to your accountant. Ask how revenue should be released, whether any amount is refundable, and how GST/HST on advance payments should be handled, since the timing rules for sales tax are separate.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.