A worked example
A customer buys an annual plan for $1,200 and you invoice it on January 1. The invoice records $1,200 as money owed to you and $1,200 as deferred revenue, which is a liability, not income. When the customer pays, cash goes up and the amount owed to you goes down. Revenue is still zero.
At the end of January you move $100 from deferred revenue to subscription revenue. You make the same $100 entry each month. After six months, $600 has been earned and $600 remains in deferred revenue. After twelve, the balance is zero and the full $1,200 has been earned.
A schedule makes it routine
Keep one row per contract: customer, start date, term, total billed, the monthly release and the amount still unearned. Add up the unearned column and it should equal the deferred revenue balance in your books. If it does not, one of the two is wrong, and you have found the problem early.
Many owners post one summary entry each month rather than one per customer, with the schedule as the support. Whichever way you post it, do it on the same day of every close. The free SaaS revenue schedule template builds this view from your contract list.
Cancellations and refunds
What happens to the unearned part when a customer leaves depends on your contract and your refund policy. If you refund the unused months, the refund reduces deferred revenue, not revenue you have already earned. If the contract is non-cancellable and nothing is refunded, how and when the rest is recognized follows your accounting policy.
Decide the treatment once, write it down and apply it the same way every time. Your CPA should confirm it, because the same cash can be treated differently under different terms.
Multi-year deals and upgrades
A customer who prepays two or three years creates two kinds of liability. The part you will earn in the next twelve months is a current liability. The rest is long-term. Your reports should split them, since lenders and buyers look at working capital.
A mid-term upgrade changes the monthly amount from the upgrade date forward. Add a new line to the schedule from that date rather than rewriting the old one, so the history stays readable.
Reconcile it every month
Your billing system probably reports unearned or deferred revenue. Compare that figure to your books each month. Small differences usually come from the timing of invoices, credits that were issued but not applied, or a plan change entered in one place only. Large ones deserve a customer-by-customer look.
If you are not sure whether your books should follow accrual accounting and the revenue recognition standard used in US generally accepted accounting principles, ask your CPA. It often depends on who will read your statements, such as a lender or an investor.
Common questions
Is deferred revenue an asset or a liability?
A liability. It is cash or a bill for service you have not yet delivered, so it is something you owe until you deliver it.
Do I need deferred revenue with cash-basis books?
Cash-basis books record money when it arrives and skip it. Investors, lenders and buyers often expect accrual books for a software company, so ask your CPA which you need.
Is deferred revenue taxed when I receive the cash?
Tax treatment can differ from the way your books record it. This is a question for your CPA, not something to guess.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.