Definition: Deferred revenue, also known as unearned revenue, refers to advance payments a company receives for products or services that are to be delivered or performed in the future. The company that receives the prepayment records the amount as deferred revenue, a liability, on its balance sheet.

In Plain English: Deferred revenue is a liability that tracks the revenue from a prepayment that your company has not yet earned through a good or service.

Example: A customer pays for a $120 annual subscription from your company, putting $120 into your deferred revenue. After one month of serving your customer, your deferred revenue for the customer goes down by $10 (the monthly earning of the subscription) to $110.

Deferred revenue is important to understand when offering a good or service with a prepayment or annual subscription. To properly account for this revenue, you must reflect in your balance sheet that you still owe the customer goods or services in order to fully earn the prepayment or annual subscription’s revenue.