Deferred revenue is not just a balance sheet item — it’s a forward-looking, strategic KPI that helps SaaS startups communicate stability, plan growth, and manage investor expectations. For startup CFOs, tracking and understanding deferred revenue is essential to building a credible financial narrative and ensuring long-term operational health. Let’s say your SaaS company bills a customer $24,000 on March 1 for a two-year license. Each subsequent month reduces that balance until fully recognized by the end of month 24. For example, if your startup signs multiple annual contracts in Q1, your bookings and cash flow spike — but your recognized revenue remains modest. By managing and reporting deferred revenue properly, CFOs ensure transparency and build investor trust.

This will be the most significant financial statement that you can generate. The multi step income statement entry will be documented in the short-term liabilities section. You need to credit the unearned revenue and debit the cash entry because this is a cash increase for the business. The initial step is to debit prepaid revenue under current liabilities.

Why is unearned revenue important for my business?

Yes, if a company is unable to deliver the promised goods or services, unearned revenue may need to be refunded to the customer. Unearned revenue is typically recognised as earned revenue within a short period, usually less than a year. Deferred revenue, on the other hand, may be recognised over a longer period, spanning multiple accounting periods. You will, therefore, need to make two double-entries in your business’s records when it comes to unearned revenue, once when it is received, and again when it is earned.

How to Calculate Unearned Revenue?

On 30 December 2018, ABC Co. received $1,000 as a payment in advance from its client for a consulting service that it will provide from 02 Jan 2019 to 08 Jan 2019. On 10 January 2019, the company received a cash payment of $150 on the service charged above from its customer. ABC Co. provided repair service to its customer in which it charged $150 for the service on 15 December 2018. The credit and debit are the same amount, as is standard in double-entry bookkeeping. Additionally, as hybrid billing models gain traction (e.g., usage-based pricing), some companies split deferred revenue into fixed and variable components for clarity. This allows better understanding of committed revenue versus usage-driven upside.

Unearned revenue or deferred revenue is considered a liability in a business, as it is a debt owed to customers. It is classified as a current liability until the goods or services have been delivered to the customer, after which it must be converted into revenue. At the end of the six months, all unearned revenue has converted into revenue, since all money received accounts for the six mystery boxes that have been paid for. Once, the company fulfills its obligation by providing the goods or services to the customers, it can make the journal entry to transfer the unearned revenue to the revenue as below. This aligns with Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which emphasize the matching principle. For example, if a software company receives an annual subscription fee upfront, it must how to calculate marginal cost recognize the revenue over the subscription period, not at the time of payment.

Reporting Requirements for Unearned Revenue

As the company delivers the goods or provides the services, it can recognize the corresponding revenue. This transition is crucial, as it moves the revenue from a liability to an asset – specifically, from unearned revenue to earned revenue. Whether unearned revenue should be categorized as a liability or not.

However, sometimes companies may also transfer goods and not receive funds for it but still need to record their revenue. On the other hand, companies may receive money even if they haven’t transferred goods yet. Unearned revenue is recorded as liabilities when the cash is received. These liabilities amount will be released/derecognized simultaneously with the revenues recognition when the performance obligation is met. Positive cash flow can keep a small business’s operations thriving.

Revenue Recognition Principle

This unearned revenue is later added to financial accounting when the company delivers the service or the product. However, this is only applicable when the business meets the below criteria as per the Securities and Exchange Commission (SEC). Conversely, if you have received revenue from a client but not yet earned it, then you record the unearned revenue in the deferred revenue journal, which is a liability.

HOW IS UNEARNED REVENUE CLASSIFIED IN FINANCIAL STATEMENTS?

Media companies like magazine publishers often generate unearned revenue as a result of their business models. Each activity in a publisher’s business strategy can benefit from the resulting cash flow of unearned revenue. An easy way to understand deferred revenue is to think of it as a debt owed to a customer. Unearned revenue must be earned via the distribution of what the customer paid for and not before that transaction is complete. By delivering the goods or service to the customer, a company can now credit this as revenue.

• Financial stability is also gained by effectively managing unearned revenue.
• Unearned revenue always plays a vital role in the reporting of a business.
• Once the business actually provides the goods or services, an adjusting entry is made.
• Many professionals are often confused about whether to consider unearned revenue as a debit or credit.
• On 1st April, a customer paid $5,000 for installation services, which will render in the next five months.
• Unearned revenue is recorded as a current liability when the products or services are to be delivered in the next 12 months or lower than 12 months.
• Whether you have earned revenue but not received the cash or have cash coming in that you have not yet earned, use Baremetrics to monitor your revenue performance and sales data.

In terms of accounting for unearned revenue, let’s say a contractor quotes a client $5,000 to remodel a bathroom. If the contractor received full payment for the work ahead of the job getting started, they would then record the unearned revenue as $5,000 under the credit category on the balance sheet. The contractor would also record the $5,000 in cash under the debit category. Assuming a SaaS company Y provides services worth 20% of the prepaid revenue, there will be a $8,000 debit to the unearned revenue account. On the other hand, credit will be on the service revenue account of the same amount i.e. $8000. Deferred revenue includes any revenue that is not recognized as income because of non-delivery of goods or services.

How does deferred revenue impact SaaS financial reporting?

This principle ensures accurate reflection of a company’s financial performance on its financial statements, allowing stakeholders to make informed decisions. The cash account will be debited while the unearned revenue account will be credited with this amount. The initial step in this process is the unearned revenue entry in the books as a cash account debit. The initial journal entry indicates that the company receives cash for credit earned.

Unearned revenue can provide clues into future revenue, although investors should note the balance change could be due to a change in the business. Morningstar increased quarterly and monthly invoices but is less reliant on upfront payments from annual invoices, meaning the balance has been growing more slowly than in the past. High-growth SaaS companies like HubSpot and Atlassian routinely report deferred revenue and Remaining Performance Obligations (RPO) as proof of recurring demand. In fact, Snowflake reported over $4.1 billion in RPO in 2024, showcasing the magnitude of contracted but unearned revenue that underpins future growth. A company cannot immediately recognize the cash proceeds received in advance as revenue because it is against the guidelines of the IFRS 15, which deals with revenue recognition. Unearned revenue is the amount that the supplier receives in advance from a customer for which the goods or services are not supplied to or satisfied by the customers.

What Is the Vendor Payment Process and How Can It Be Improved?

• Designed for growth-oriented businesses, Moon Invoice alleviates the burden of managing business finances.
• Deferred revenue is a broader term that encompasses unearned revenue and other types of revenue that are received in advance but have not yet been recognised on the income statement.
• The customer pays the full yearly amount in advance to obtain a discount of $200.
• Unearned revenue should be entered into your journal as a credit to the unearned revenue account and as a debit to the cash account.
• For fundraising rounds, showing deferred revenue growth alongside customer acquisition signals strong market demand.
• According to the situation and the agreement between the parties, the unearned revenue entry might be different.

Depending on the size of your company, its ownership profile, and any local regulatory requirements, you may need to use the accrual accounting system. Magazine or software subscriptions often require upfront payment for future access to content or services. Another trend is pairing deferred revenue with metrics like Net Revenue Retention (NRR) and billings to get a complete view of sales momentum. Modern dashboards used by CFOs often show changes in deferred revenue alongside ARR growth. In the past few years, investors have become more focused on forward-looking metrics like deferred revenue and RPO.

Therefore, the journal entry to record this transaction is as follows. In accounting practices, both these terms are used interchangeably. Therefore, when considering unearned or deferred income, you should recognize it as a current liability.

As the services are provided over time, accountants perform adjusting entries to recognize the earned revenue. The unearned revenue is documented in the liabilities section of the balance sheet. It is always treated as a liability on the balance sheet and the main reason for this is incomplete transactions. Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission established Generally Accepted Accounting Principles (GAAP).

The revenue recognition concept states that the revenue should be recognized when the goods are delivered or services are rendered, and there is a certainty of payment realization. Therefore any unearned income should not be recognized as revenue and should be treated as a liability until the mentioned conditions are fulfilled. This is because the company has an obligation to provide goods or services in the future in exchange for the payment it has already received. Until the company fulfils its obligation, the payment remains a liability.

Zoom, known for its rapid pandemic-era growth, used deferred revenue as a key line item to signal contract strength. In FY2023, its deferred small business tax information revenue dipped as some monthly subscriptions churned — offering investors a real-time lens on changing customer behavior. Beyond compliance, deferred revenue signals a customer’s commitment to your product. It demonstrates that the company has locked in revenue that will be earned over time, which supports accurate budgeting, headcount planning, and investor messaging. After a month, ABC Co. sells $10,000 worth of goods to XYZ Co. against the amount received in advance.