The Difference Between Unearned Revenue and Deferred Revenue

by Cam Merritt, studioD

The accounting terms "unearned revenue" and "deferred revenue" refer to the same thing: money that a company has received for products it has not yet delivered or services it has yet to perform. The different names reflect different ways of looking at this category of revenue -- and offer insight on how corporations account for money that comes in the door.

Revenue Recognition Principle

Under the "revenue recognition principle" -- a fundamental concept in corporate accounting -- a company records revenue in its books when it earns that revenue, not when it actually receives payment. Revenue is considered earned when the company has fulfilled its entire obligation in a transaction. For example, if you buy a new mattress from a store that doesn't require payment for six months, the store will record the revenue when it delivers your new mattress. Regardless of when you actually pay for the mattress, the delivery marks the point at which the store has earned your money.

"Unearned" Revenue

Suppose you order a mattress for delivery in two weeks, and you pay for it in full at the time you order it. The company now has your money -- but it still has the obligation to deliver your mattress. In other words, it has not earned that money. The company's financial records have to acknowledge receiving your money, but designating it as "unearned revenue" recognizes the fact that the store hasn't done what it needs to do to record the revenue. There are still strings attached to the money.

"Deferred" Revenue

Calling unearned money "deferred revenue," meanwhile, puts the emphasis on the transaction's future economic benefit to the company rather than its immediate obligation. The money that has been received is legitimate revenue that the company has every right to claim -- just not yet. While "unearned" can imply that the money might not rightfully belong to the company, "deferred" asserts that it does; it's just a question of timing.

Accounting Treatment

Whether you call it deferred revenue or unearned revenue, it ends up in the same place on the company's balance sheet. The money received as payment goes into the company's "cash" account on the asset side of the balance sheet. The company then places an offsetting amount in the "deferred revenue" (or "unearned revenue") account on the liabilities section of the sheet. At this point, nothing appears on the company's income statement because the company has not officially booked any revenue. Once the company fulfills its obligation and earns that money, it eliminates the liability on the balance sheet and declares the revenue on the income statement, from which the revenue flows back to the balance sheet as retained earnings.


About the Author

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.