A customer signs an annual subscription and pays $12,000 up front. The money is in the bank on day one, but you haven't done a year of work yet. Deferred revenue is how the books hold that gap: the cash is yours, the revenue isn't yet.
The entries for that case are simple. The harder question comes up the first time you invoice an annual contract before the customer pays. Do you book anything when the invoice goes out? ASC 606 answers it with a specific example, and the answer depends on whether the contract can be cancelled.
The entries when the customer pays up front
Say the customer pays $12,000 on January 1 for twelve months of service, and you deliver it evenly across the year.
On January 1, when the cash arrives:
| Account | Debit | Credit |
|---|---|---|
| Cash | 12,000 | |
| Deferred revenue | 12,000 |
At the end of each month, as a month of service is delivered:
| Account | Debit | Credit |
|---|---|---|
| Deferred revenue | 1,000 | |
| Revenue | 1,000 |
After twelve months the deferred revenue balance is zero and the P&L shows $12,000 of revenue, $1,000 in each month. Your bank account shows $12,000 in January. Both are right. They answer different questions.
Deferred revenue sits on the balance sheet as a liability. ASC 606 calls it a contract liability, which paragraph 606-10-45-2 defines as an obligation to transfer goods or services to a customer for which the company "has received consideration (or an amount of consideration is due)".
When you invoice before the customer pays
That last phrase, "or an amount of consideration is due", is the part that decides the harder case. Paragraph 606-10-45-2 says you present the contract liability "when the payment is made or the payment is due (whichever is earlier)". The date the invoice goes out isn't on that list.
FASB works through it in Example 38 of ASU 2014-09, "Contract Liability and Receivable". A company signs a contract on January 1 to deliver a product on March 31. The customer owes $1,000 in advance by January 31 and actually pays on March 1. The example runs the same facts twice.
If the contract can be cancelled
Nothing is recorded on January 31, even though the payment was due. The customer could still walk away, so the company doesn't yet have an unconditional right to be paid.
March 1, cash arrives before delivery:
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,000 | |
| Contract liability | 1,000 |
March 31, product delivered:
| Account | Debit | Credit |
|---|---|---|
| Contract liability | 1,000 | |
| Revenue | 1,000 |
If the contract can't be cancelled
Now the due date matters. Paragraph 606-10-45-4 says a right to payment is unconditional "if only the passage of time is required before payment of that consideration is due". On January 31 that is true, so the company books a receivable and a contract liability together.
January 31, payment due:
| Account | Debit | Credit |
|---|---|---|
| Receivable | 1,000 | |
| Contract liability | 1,000 |
March 1, cash arrives:
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,000 | |
| Receivable | 1,000 |
March 31, product delivered:
| Account | Debit | Credit |
|---|---|---|
| Contract liability | 1,000 | |
| Revenue | 1,000 |
What the invoice date changes
Nothing. Paragraph 55-286 closes the example: if the company had sent the invoice before January 31, it still would not show the receivable and the contract liability on the balance sheet, because it didn't yet have an unconditional right to the money. The due date decides it, not the invoice date.
In accounting software this is where books drift. An invoicing tool that posts a receivable and revenue, or a receivable and deferred revenue, the moment an invoice is created gets the timing wrong in both cases. For a noncancellable annual contract invoiced two weeks before it's due, that puts both balances on the books two weeks early. For a cancellable contract it puts them there before the company has a right to be paid at all.
Why the gross-up matters
It can look like bookkeeping for its own sake, since the receivable and the liability are the same amount. It shows up in three places.
Your balance sheet. Booking every invoice as soon as it's sent inflates both receivables and deferred revenue. A reader looking at receivables to judge collections sees money that isn't owed yet.
Your SaaS metrics. Investors can read deferred revenue as a forward indicator of revenue already contracted. Mixing billed-but-not-due invoices into it makes that number less reliable.
Due diligence. Anyone reviewing your books for a raise will reconcile deferred revenue to the contracts. Balances that come from invoice timing rather than contract terms take time to explain.
Setting it up in your books
Deferred revenue works best as its own balance sheet account, not netted into receivables. Keep a schedule by customer with the contract amount, the service period, whether the contract can be cancelled, the due date and the amount recognized to date. Post the monthly recognition entry from the schedule, then check that the schedule's unrecognized total equals the account balance.
Two things to decide in writing and keep consistent: how you tell a cancellable contract from a noncancellable one (it's the contract terms, not how likely the customer is to leave), and whether your invoicing tool's automatic entries are reversed and rebooked on the due date or turned off for annual contracts.
For how revenue recognition works beyond these entries, including performance obligations and when revenue is recognized over time or at a point in time, see our revenue recognition guide for startups. If your Stripe data is the source of these invoices, automating Stripe revenue tracking covers the feed side.
Source: FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), paragraphs 606-10-45-1, 45-2 and 45-4 and Example 38 (55-284 to 55-286), as published by FASB.