Deferred Revenue vs Accrued Revenue: Invoicing Examples
Deferred revenue vs accrued revenue explained with invoicing examples, journal entries and a comparison table to record prepayments and unbilled work correctly.
Quick answer: In the deferred revenue vs accrued revenue comparison, the difference is timing. Deferred revenue is billed or paid before you deliver, so it is a liability until earned. Accrued revenue is earned before you invoice, so it is an asset until billed. Both come from accrual accounting, which records revenue when it is earned, not when cash moves.
If you invoice annual retainers upfront, take project deposits, or bill monthly for work done the month before, you are already creating deferred or accrued revenue whether you track it or not. Getting the timing right matters for accurate monthly profit, clean month-end closes and fewer surprises when your accountant reviews the books. This guide explains both concepts with simple invoicing examples, journal entries and a side-by-side comparison.
Why timing creates two kinds of revenue
Under accrual accounting, revenue is recognized when you satisfy your obligation to the customer, typically when you deliver the goods or perform the service, regardless of when you invoice or get paid. Invoicing and delivery do not always happen on the same day, which leaves two possible gaps:
- Invoice or cash first, work later: deferred revenue.
- Work first, invoice later: accrued revenue.
Under cash-basis accounting, neither concept applies, because revenue is recorded only when cash arrives. Many very small businesses start on a cash basis and move to accrual as they grow, take on investors or need GAAP financial statements.
What is deferred revenue?
Deferred revenue, also called unearned revenue, is money you have received or billed in advance for goods or services you have not yet delivered. Because you still owe the customer something, it is recorded as a liability on the balance sheet. Each period, as you deliver, you move a portion out of the liability and into revenue.
Common invoicing situations that create deferred revenue:
- Annual or quarterly retainers billed upfront.
- Project deposits collected before work starts, often via a deposit invoice.
- Prepaid subscriptions, maintenance plans or support contracts.
- Gift cards, vouchers and prepaid class packs.
- Event tickets sold before the event.
Under the US revenue standard, ASC 606, deferred revenue is generally presented as a contract liability. Our explainer on revenue recognition under ASC 606 covers the five-step model behind this.
What is accrued revenue?
Accrued revenue is revenue you have earned by delivering goods or services but have not yet invoiced. Because you have a right to payment, it is recorded as an asset, often labeled unbilled receivables or accrued income. When you send the invoice, the amount moves into regular accounts receivable.
Common situations that create accrued revenue:
- Hourly or time-and-materials work billed monthly in arrears.
- Long projects where work runs ahead of agreed milestone payments.
- Usage-based services billed after the period ends, as described in our guide to usage-based billing invoices.
- Interest earned on a deposit but not yet credited.
Under ASC 606, if your right to payment depends only on time passing, the amount is a receivable. If it depends on something else, such as completing the next milestone, it is a contract asset. For most small businesses the practical label is "unbilled revenue."
Deferred revenue vs accrued revenue: side-by-side comparison
| Feature | Deferred revenue | Accrued revenue |
|---|---|---|
| Timing | Invoice or cash before delivery | Delivery before invoice |
| Balance sheet type | Liability | Asset |
| Other names | Unearned revenue, customer deposits, contract liability | Unbilled revenue, accrued income, contract asset |
| What you owe or are owed | You owe the customer goods or services | The customer owes you, but has not been billed |
| Typical examples | Annual retainers, deposits, subscriptions | Hourly work billed in arrears, unbilled milestones |
| Cash flow effect | Cash arrives early, helping liquidity | Cash arrives late, tying up working capital |
| Month-end adjustment | Move earned portion to revenue | Record earned but unbilled amount as revenue |
| Cleared when | You deliver the goods or services | You issue the invoice |
Deferred revenue vs accrued revenue in practice: worked examples
Example 1: annual retainer billed upfront (deferred revenue)
Illustrative scenario: a bookkeeping firm invoices a client $12,000 on January 1 for twelve months of monthly bookkeeping. The client pays on January 10. The firm uses accrual accounting.
Monthly revenue: $12,000 ÷ 12 months = $1,000 per month.
| Date | Entry | Debit | Credit |
|---|---|---|---|
| Jan 1 | Accounts receivable / Deferred revenue (invoice issued) | $12,000 | $12,000 |
| Jan 10 | Cash / Accounts receivable (payment received) | $12,000 | $12,000 |
| Jan 31 | Deferred revenue / Revenue (one month earned) | $1,000 | $1,000 |
| Feb 28 | Deferred revenue / Revenue (one month earned) | $1,000 | $1,000 |
At the end of March, the firm has recognized 3 × $1,000 = $3,000 of revenue, and the deferred revenue balance is $12,000 − $3,000 = $9,000. The firm has all $12,000 in cash, but $9,000 of it still represents work owed to the client.
Some businesses record the invoice directly to deferred revenue only when payment is received, rather than when the invoice is issued. Whether a billed but unpaid advance invoice belongs on the balance sheet depends on whether the contract is non-cancellable and payment is due. Ask your accountant which approach fits your contracts. For retainers specifically, see our retainer invoice guide.
Example 2: hourly work billed in arrears (accrued revenue)
Illustrative scenario: a freelance developer bills $100 an hour and invoices on the 5th of each month for the previous month's work. In March they work 40 hours. The March invoice is issued on April 5.
Earned in March: 40 hours × $100 = $4,000.
| Date | Entry | Debit | Credit |
|---|---|---|---|
| Mar 31 | Accrued revenue (unbilled receivables) / Revenue | $4,000 | $4,000 |
| Apr 5 | Accounts receivable / Accrued revenue (invoice issued) | $4,000 | $4,000 |
| May 5 | Cash / Accounts receivable (payment received, net 30) | $4,000 | $4,000 |
Without the March 31 accrual, March would show $4,000 too little revenue and April $4,000 too much. With it, each month reflects the work actually done. Notice the cash arrives on May 5, more than a month after the work ended, which is why accrued revenue is a signal to look at your billing frequency.
Example 3: a project with both
Illustrative scenario: a web agency signs a $20,000 website project. It invoices a 30% deposit at signing, 40% at design approval and 30% at launch.
- Deposit: $20,000 × 0.30 = $6,000, paid upfront. At signing, the agency has delivered nothing, so the $6,000 is deferred revenue.
- End of month 1: the agency estimates it has completed 45% of the work: $20,000 × 0.45 = $9,000 earned. It has billed only $6,000. Earned minus billed is $9,000 − $6,000 = $3,000, so the contract shows a net $3,000 contract asset (unbilled revenue).
- Design approval invoice: $20,000 × 0.40 = $8,000. Total billed is now $14,000. If earned work is still $9,000, the contract has a net liability of $14,000 − $9,000 = $5,000.
The same contract can swing between an asset and a liability depending on whether billing runs ahead of or behind the work. Measuring progress on long projects requires judgment, so this is an area where many small businesses lean on an accountant.
Related terms that are easy to confuse
Revenue has two timing accounts, and expenses have two mirror-image accounts. Knowing all four makes month-end adjustments much easier to follow:
- Deferred revenue: you were paid early and owe the customer work (liability).
- Accrued revenue: you did the work and have not billed yet (asset).
- Prepaid expenses: you paid a supplier early, such as annual insurance or software, and they owe you service (asset).
- Accrued expenses: you received goods or services and have not been billed or paid yet, such as wages earned at month end (liability).
Your deferred revenue is your customer's prepaid expense, and your accrued revenue is often their accrued expense. Thinking about the other side of the invoice can help you check that the treatment makes sense.
How invoicing practices affect each balance
Your invoicing choices directly shape both balances:
- Billing in advance builds deferred revenue and improves cash flow. Clearly state the service period on the invoice, for example "Bookkeeping services, January 1 to December 31, 2027," so the customer and your accountant can see what is being prepaid.
- Billing in arrears creates accrued revenue and delays cash. Shortening the gap, for example by billing weekly or at each milestone, reduces it.
- Partial periods need clear calculations; a prorated invoice shows how a partial month was priced.
- Deposits on the final invoice should show the amount already paid and the balance due, so the customer is not billed twice.
Our free invoice generator lets you add line items with service dates, record an amount already paid and show the balance due on a downloadable PDF. It does not post journal entries, so your accounting system or bookkeeper still handles the deferral and accrual adjustments. If you send a quote-style document before the contract is final, note that a proforma invoice is not a demand for payment and usually does not create deferred revenue until the customer pays.
Checklist: recording deferred and accrued revenue each month
- List every invoice issued for future periods and confirm the service dates.
- Calculate how much of each prepaid amount was earned this month and move it to revenue.
- Reconcile the deferred revenue balance to a schedule of remaining obligations by customer.
- List all work delivered but not yet invoiced at month end, with hours or quantities.
- Record accrued revenue for that unbilled work.
- Reverse or clear last month's accruals when the related invoices are issued.
- Check that deposits are applied correctly on final invoices.
- Include both steps in your month-end close checklist.
Common mistakes
- Recording prepayments as revenue on receipt. A $12,000 annual payment booked as January revenue overstates January profit and understates the next eleven months.
- Forgetting unbilled work at month end. If you bill monthly in arrears and skip accruals, your monthly results lag reality by a month.
- Not reversing accruals. If you record accrued revenue and then also record the invoice as new revenue, you count the same work twice.
- Vague service periods on invoices. Without dates, neither you nor the customer's accountant can tell what period the charge covers.
- Treating refundable deposits as earned. If the customer can cancel and get the deposit back, it is clearly still a liability.
- Assuming tax follows the books. Tax timing rules for advance payments can differ from accounting rules. Check before you file.
A note on tax treatment
Financial reporting and tax reporting do not always follow the same timing. In the US, the IRS describes accounting methods, including cash and accrual and the treatment of advance payments, in Publication 538, Accounting Periods and Methods. US GAAP revenue rules are set by the Financial Accounting Standards Board. Rules in other countries differ, and this article is general information, not tax or accounting advice.
Summary
Deferred revenue vs accrued revenue is really a question of which came first, the invoice or the work. Deferred revenue means you have been paid or billed ahead and owe the customer; accrued revenue means you have done the work and owe yourself an invoice. Track both at every month end, describe service periods clearly on your invoices, and your profit figures will reflect what actually happened. For more side-by-side explainers, browse our comparisons section.
Frequently asked questions
What is the main difference between deferred and accrued revenue?
It comes down to timing. Deferred revenue arises when you invoice or are paid before you deliver the work, so you owe the customer goods or services and record a liability. Accrued revenue arises when you deliver the work before you invoice, so you have earned income that has not been billed yet and record an asset. Both exist only under accrual accounting.
Is deferred revenue a liability or an asset?
Deferred revenue, also called unearned revenue, is a liability. You have received cash or billed the customer, but you still owe them the goods or services. As you deliver, you move the amount out of the liability and into revenue. Under the US revenue standard ASC 606 it is generally presented as a contract liability.
Is accrued revenue the same as accounts receivable?
Not quite. Accounts receivable represents amounts you have invoiced and have an unconditional right to collect. Accrued revenue is earned but not yet invoiced, so it is often recorded as unbilled receivables or, under ASC 606, a contract asset when the right to payment depends on something other than time. Once you send the invoice, it becomes a normal receivable.
Do I need to track deferred revenue if I use cash accounting?
Under cash-basis accounting you record revenue when cash arrives, so deferred and accrued revenue do not appear in your books. Many sole proprietors and small businesses use cash accounting for simplicity. If you use accrual accounting, need GAAP financial statements for a lender or investor, or plan to grow, you will need to track both.
How do I record a customer deposit on an invoice?
Under accrual accounting, a deposit for work not yet done is recorded by increasing cash and increasing a deferred revenue or customer deposits liability. When you complete the work and issue the final invoice, you recognize the full revenue and apply the deposit against the amount owed. Your final invoice should show the deposit as an amount already paid.
Is deferred revenue taxed when it is received?
Tax and accounting rules can differ. In the US, accrual-method taxpayers may be able to defer some advance payments to the following tax year under specific IRS rules, while cash-method taxpayers generally include payments in income when received. The details depend on your situation and change over time, so confirm the treatment with a tax professional before filing.
What is an example of accrued revenue for a freelancer?
A freelance developer works 40 hours in late March at $100 an hour but invoices monthly on the 5th. On March 31 they have earned $4,000 that is not yet billed. Under accrual accounting they record $4,000 of accrued revenue in March. When they issue the invoice on April 5, the accrued amount becomes a normal accounts receivable.
Why does the difference matter for small businesses?
Recording revenue in the right month gives a truer picture of profit and margins, which matters for pricing, loan applications and tax planning. Booking a year of prepaid fees as revenue in one month inflates that month and understates the rest. Missing unbilled work does the opposite. Accurate timing also reveals billing delays that hurt cash flow.
Can one contract have both deferred and accrued revenue?
Yes, at different times. A project might start with a deposit, creating deferred revenue, and then the work could run ahead of the agreed billing milestones, creating unbilled revenue. Under ASC 606, balances for a single contract are typically netted so the contract shows either a net contract asset or a net contract liability at the reporting date.
Invoice Creator Editorial Team
Guides on invoicing, cash flow and small-business finance from Invoice Creator, operated by Next Software Development Company. Content is reviewed for accuracy against the fields our own invoice generator produces.
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