Accounts receivable vs deferred revenue explained with journal entries, balance sheet impact, cash flow effects, KPIs, and SaaS best practices.
Dadhich Rami 
Accounts receivable (AR) and deferred revenue (also called unearned revenue) are two of the most frequently misunderstood items on a balance sheet, yet misunderstanding them can significantly impact your financial accuracy, cash forecasting, and investor confidence.
In simple terms:
Mixing them up leads to misstated income, incorrect KPIs, failed audits, and poor cash flow planning, especially in SaaS and subscription businesses.
This guide covers everything finance, sales, and RevOps teams need to know.
| Aspect | Accounts Receivable (AR) | Deferred Revenue (Unearned Revenue) |
| Definition | Money customers owe you for delivered goods/services | Money received for goods/services not yet delivered |
| Balance Sheet Classification | Current Asset | Current Liability (or long-term if >12 months) |
| When Recognized | When performance obligation is satisfied | When cash is received before delivery |
| Revenue on Income Statement | Already recognized | Not yet recognized |
| Cash Flow Impact (Increase) | Decreases operating cash flow | Increases operating cash flow |
| Typical Business | B2B services, invoicing after delivery | SaaS, subscriptions, retainers, prepaid contracts |
It’s also important not to confuse accounts receivable vs accounts payable, as both affect working capital in opposite ways. Accounts receivable represents money customers owe you, while accounts payable represents money you owe vendors. Strong companies actively shorten AR cycles while strategically managing payables to optimize cash flow without harming supplier relationships.
Accounts receivable means “We delivered → Customer owes us” (asset).
Deferred revenue means “Customer paid → We still owe delivery” (liability).
Accounts receivable also plays a direct role in short-term liquidity and cash forecasting. Even though AR represents earned revenue, it does not equal cash in hand. Understanding the relationship between accounts receivable and cash flow is critical for finance teams to avoid overestimating operating cash and runway. Poor AR management can show strong revenue on paper while silently straining working capital.
Under ASC 606 / IFRS 15, revenue is recognized when control transfers, not when cash moves. That’s why:
Ignoring this distorts profit, working capital, burn rate, and Rule of 40 calculations in SaaS.
Sale on Credit → Creates Accounts Receivable Customer is invoiced $10,000 after delivery
text
Dr Accounts Receivable 10,000
Cr Revenue 10,000
When customer pays:
text
Dr Cash 10,000
1. Cr Accounts Receivable 10,000
Annual Subscription Prepaid → Creates Deferred Revenue Customer pays $12,000 on Jan 1 for 12 months Initial receipt:
text
Dr Cash 12,000
Cr Deferred Revenue 12,000
Monthly recognition ($1,000/month):
text
Dr Deferred Revenue 1,000
2. Cr Revenue 1,000
Service Performed but Not Yet Billed (Accrued Revenue)
text
Dr Accounts Receivable 5,000
3. Cr Revenue 5,000
Balance Sheet
Income Statement
Neither appears directly. Only when deferred revenue is recognized does it flow to revenue.
Cash Flow Statement (Indirect Method)
To accurately measure AR quality not just AR size—finance teams rely on the aging of accounts receivable method. This method breaks receivables into time buckets (current, 30, 60, 90+ days) to identify collection risk, customer payment behavior, and potential bad-debt exposure. Aging analysis is especially important in SaaS businesses where high deferred revenue can mask underlying AR collection problems.
| KPI | Formula | Good Benchmark (SaaS) |
| Days Sales Outstanding (DSO) | (AR ÷ Total Credit Sales) × Days in Period | < 45 days |
| AR Turnover | Net Credit Sales ÷ Average AR | > 8x |
| Deferred Revenue Growth | Current Deferred ÷ Prior Deferred | Shows backlog health |
| Current Ratio Impact | Consider both AR (asset) and Deferred (liability) | - |
| Cash Conversion Score | Includes changes in AR and Deferred | - |
Tools like QuickReceivable, Chargebee, Maxio, and Zuora automatically:
This removes 95% of manual spreadsheets and human error.
Yes, very common in SaaS with mixed annual + monthly billing.
Mastering the difference between accounts receivable and deferred revenue is essential for accurate financial statements and reliable SaaS metrics.
Remember:
Get this right → cleaner books, happier auditors, better fundraising, and more predictable cash flow.
Whether you're looking to streamline invoicing, set up secure online payments, or need a custom made payment solution, our team is always ready to help you move faster, safer, and smarter with QuickPayable.
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