Is Deferred Revenue the Same As Unearned Revenue?

by Cam Merritt; Updated September 26, 2017

On a company's balance sheet, "deferred revenue" and "unearned revenue" are the same thing. They both refer to an item that initially goes on the books as a liability -- that is, an obligation that the company must fulfill -- but later becomes an asset, or something that increases the net worth of the company. The dual names stem from the process by which a company records such revenue.

Accrual Accounting

In general, businesses keep track of the money coming in and going out one of two ways: with cash accounting or with accrual accounting. Cash accounting is the simpler method. When money comes in, you put it on your balance sheet as cash, an asset, regardless of when you provide the goods or perform the service the customer has paid for. In accrual accounting, you don't count that money as cash until you provide the goods or services. But in the meantime, you still have the money -- you can't book it as an asset, but it still has to go somewhere on the balance sheet. That's where deferred or unearned revenue comes in.

Unearned Revenue

Say you own a business that makes widgets. A customer orders 1,000 custom-made widgets at $15 apiece and sends you a check for $15,000. Because they'll be custom widgets, you can't deliver them for two months. If you were using cash accounting, you'd go ahead and book the $15,000 in revenue right now. Under accrual accounting, however, the $15,000 isn't an asset yet, because you haven't delivered the widgets. That $15,000 is in your bank account, but you haven't earned it yet -- thus it is "unearned revenue."

Booked as a Liability

You've got the customer's $15,000, but you still owe that customer his widgets. The $15,000 represents an obligation for your business, and that makes it a liability. Any company that uses accrual accounting will have a category for unearned or deferred revenue on its balance sheet. This category might be called something like "Customer Deposits" instead, but the concept is the same.

Deferred Revenue

Two months pass, you deliver the custom-made widgets to your customer, and everyone's happy. At that point, the $15,000 no longer represents a liability to your company. It's simply cash. And cash always goes on the balance sheet as an asset. So you remove $15,000 from the "Unearned Revenue" column on the liability side and move it to the "Cash" column on the asset side. Though you received the money two months ago, you put off -- deferred -- booking it until you delivered the widgets. That makes it "deferred revenue."

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.