Deferred Revenue vs Accounts Receivable - Differences and Examples

If you’re responsible for handling finances for a UK-based small business, then you’ve probably heard of deferred revenue and accounts receivable. They represent how much has been paid to you in advance versus how much is still due.

Why does this difference matter? HMRC reports that by March 2023, UK businesses had £5.7 billion in tax debt under Time to Pay arrangements¹—a clear sign of how cashflow struggles can cripple companies.

Many businesses overlook the distinction between accounts receivable and deferred revenue—until tax deadlines force them to scramble for funds. Knowing this difference early can prevent a cashflow crisis.

This article will unpack what these terms are and what they mean for your business. It’ll also explore Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

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What is deferred revenue?

Deferred revenue is money customers pay you before you deliver goods or services. UK accounting rules state that businesses must wait to recognise revenue until they fulfill their obligations. According to FRS 102:23.78, revenue is recorded when a business transfers control of a product or service to the customer².

This means revenue is only recognised when the customer can use, benefit from, or direct the use of the purchased goods or service. Until then, any upfront payment remains deferred revenue—a liability on the balance sheet.

Hence any upfront payment is classified as deferred revenue—a liability—until you fulfill your obligation. For instance, say a gym charges £120 upfront for a year’s membership. Their customers have paid, but they can’t really call that money theirs until the customer sweats through 12 months of exercising or at least until the subscription time elapses.

This kind of revenue serves as a heads-up for businesses, especially subscription-based businesses like gyms and software companies. Essentially, you have received payment but are owing products/services. Mess it up, and you’re spending money you haven’t earned yet. Doing that can negatively affect your cashflow.

What is accounts receivable?

Accounts receivable is money owed to you after goods or services are delivered. You deliver, invoice, and wait for payment. But waiting isn’t always smooth. The Federation of Small Businesses (FSB) estimates that late payments force roughly 50,000 UK businesses to close down annually³. This is a big blow to your cashflow.

This is why keeping track of and identifying credit-worthy customers is important. It keeps your cashflow healthy and prevents bad debts.

Accounts receivable vs deferred revenue: key differences

Now that you know what accounts receivable and deferred revenue mean, let’s zero in on what sets them apart. Understanding their differences will help you understand your finances, juggle payments, and plan for the future.

Accounts receivable is money that customers owe you, so it’s an asset because it signals cash coming in the future. Deferred revenue, on the other hand, is money customers pay before you deliver, and it’s a liability because you still owe the customer.

They’re also different in timing. Accounts receivable occurs when you’ve completed the work but haven’t been paid. However, deferred revenue is when customers pay early before you deliver.

Then, there’s the financial side. They are recorded in different spots on your financial statement. On the balance sheet, accounts receivable is recorded as an asset; on the income statement, it is recorded as revenue at the point of sale. Deferred revenue, on the other hand, starts as a liability and only becomes revenue after you have delivered.

The table below shows the differences:

Examples of deferred revenue

To understand deferred revenue in action, let’s take this example: A small fitness studio offers personal training packages. A customer purchases a 12-month plan for £600 and pays it in full on March 1, 2025. The gym receives payment right away, but it’s not revenue yet. They haven’t delivered what the customer paid for.

Instead, this £600 becomes deferred revenue, a liability the customer has paid for a year’s service. As they deliver the training sessions each month, they transfer £50 ( 600 ÷ 12) of the deferred revenue to actual revenue on the income statement. By February 2026, when the plan ends, the initial £600 will completely become earned income.

However, if they take the whole £600 as revenue in March 2025, they would overstate their earnings and risk running short of cash later.

Accounts receivable examples

Let’s look at an example to understand how accounts receivable work. Imagine a graphic design firm that completes a project for a client on March 1 2025. They deliver the final design and send an invoice for £1,200, due in 30 days. They don’t have the money in their account, but they’ve done the work and recorded it as accounts receivable on the balance sheet.

It's an asset, which indicates money they should receive by early April. Once the client pays, it moves from accounts receivable to cash, with the revenue already noted on the income statement. This lets them know what’s owed without assuming it’s already paid, so they can plan if there’s a delay.

FAQs - accounts receivable vs deferred revenue

Here are some commonly asked questions:

Can accounts receivable and deferred revenue happen in the same business?

Yes, a single business can have both accounts receivable and deferred revenue at the same time. These are different types of transactions, one for work done and awaiting payment and the other for cash received before delivery. Wise Business’s instant local bank details can help you easily manage both transactions.

Can deferred revenue turn into a refund?

Yes, it can become a refund if you do not fulfill the service or deliver the product as per the agreement. If a customer makes that request and your terms allow it, you would have to refund the unearned portion.

Which is riskier for my cashflow: accounts receivable or deferred revenue?

Accounts receivable is a bigger cashflow risk since you’re waiting on payments that might never come, leaving you short fast. Deferred revenue, while a liability until earned, is less risky upfront, but you must deliver or refund it.

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Sources used:

Sources last checked on date: 23-Jun-2025