When a customer pays before you deliver — a deposit, a prepaid subscription, an annual retainer — the cash is yours to hold but not yet yours to count as income. The books record it as deferred revenue (also called unearned revenue): a liability representing your obligation to deliver.
As delivery happens, the liability converts to recognised revenue on schedule — a twelfth per month for an annual plan, a chunk per milestone for a project.
Why It Matters
Deferred revenue is the accounting name for a truth that keeps agencies and subscription businesses solvent: an upfront payment is a promise you now owe, not profit you have made. Spending it as income means funding the delivery obligation from thin air. Any business taking deposits or billing in advance carries deferred revenue, whether or not its books use the term.
Example
A studio invoices a $6,000 six-month retainer in January and is paid immediately. January’s books: cash +$6,000, deferred revenue +$6,000, income +$0. Each month through June, $1,000 moves from deferred revenue to earned revenue as the service is delivered.
Frequently Asked Questions
Is deferred revenue the same as a deposit?
A deposit is one common source of it. "Deferred revenue" is the accounting classification for any amount collected ahead of delivery, whether it arrived as a deposit, a prepayment or an advance invoice.