Is deferred revenue a liability or an asset?

A liability. The business has the cash but owes the customer the goods or service, and until it delivers it has not earned the money. When it performs, the liability is released into revenue. The cash it received is the asset; deferred revenue is the obligation that came with it. Under the international standard and its New Zealand and Australian versions the balance is presented as a contract liability, and UK accounts follow a similar model from 2026.

Is deferred revenue included in working capital?

In the accounts it is a current liability, so it reduces working capital, and a business with large prepayments can run with negative working capital. Analysts and lenders differ on whether to treat it as working capital or as something closer to debt. A lender usually reads it as operating funding that must be renewed by new orders, and a buyer of a business negotiates whether it sits in the working capital target or in net debt.

Is a customer deposit the same as deferred revenue?

Often, but not exactly. A deposit is a part payment in advance, and in the accounts it is usually part of deferred income or contract liabilities. The difference that matters to a lender is refundability. A deposit the customer can reclaim on demand or on cancellation behaves like borrowing and may be counted as debt. A non-refundable payment for work to come is an obligation to perform rather than to repay.

What happens to customer deposits if a business goes into liquidation?

In general the customer becomes a creditor for the amount paid, and unless the money was held on trust or protected by a sector rule, an unsecured one who ranks behind secured lenders. The Law Commission found in 2016 that consumers in England and Wales who prepay often recover nothing. A customer who paid by card may have a separate claim through the card issuer, depending on the card and the market. A buyer of the business may choose to honour orders, but is not obliged to.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Customer Prepayments: a Worked Example

Cash in the bank, and a promise to deliver against it.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

When a customer pays before delivery, a lender sees the money twice on the balance sheet: once as cash, and once as a liability, labelled deferred income or a contract liability. The question it asks is whose cash it is. Prepayments are working capital lent by customers at no interest, and they keep arriving only while new orders do. When orders slow, the inflow falls at once, while the work already paid for still has to be done and its costs paid. So a lender reads the balance against order intake, and decides how much of the cash it will treat as the business's own.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 07 — Coastline Retail Group. NPAT up 9%. Operating cash flow down 31%. The dividend consent request is on your desk. Your call first, then the senior banker's.

Read the file →

PART OF Credit Analysis for Beginners

// 01 — WHY A LENDER READS PREPAID CASH TWICE

Many businesses are paid before they perform: a maker that takes deposits on goods built to order, a subscription service billed a year ahead, a school or course provider collecting fees for the term, an event organiser selling tickets months out. Each receives cash before it spends on materials and wages. While sales grow, the balance grows with them and funds the business, which is why such firms can carry little bank debt or even negative working capital.

The same feature runs in reverse. The balance finances the business only while it is replenished. If new orders slow, the business must still deliver what it has been paid for, with cash it has already received and partly spent, and nothing new replaces it. In a failure the balance becomes a claim. In England and Wales, the Law Commission's 2016 report found that consumers who prepay rank as unsecured creditors and frequently receive nothing. The general starting point in New Zealand and Australia is the same for any customer, consumer or business: an unsecured claim, unless the money was held on trust, ownership of specific goods had already passed, or a sector rule protects the payment. A buyer of a failed business who takes on the prepaid orders must deliver them without the cash, which lowers what a receiver can sell the business for.

// 02 — HOW THE BALANCE IS BUILT AND READ

Prepayments balance = cash received for orders not yet delivered

Steady-state balance ≈ deposits taken a month × months from order to delivery

Cash effect = change in the balance (a rise brings cash in, a fall takes it out)

Matched cash = the part of cash a lender treats as held for prepaid orders

Under NZ IFRS 15 and AASB 15, a business presents a contract liability when the customer pays, or payment falls due, before the goods or services are transferred. UK accounts under FRS 102's revised Section 23 follow a closely aligned model for periods beginning on or after 1 January 2026; older UK accounts and many private companies' accounts in New Zealand and Australia show the same money as deferred income or customer deposits within creditors. IFRS 15 can require a long advance to be treated as partly a loan from the customer, but lets a business ignore that where delivery follows within a year, so most trade deposits carry no interest in the accounts either. When the goods are delivered, the liability becomes revenue and no cash moves, because it moved months earlier.

// 03 — THE EXAMPLE

A builder of motorhomes to order, constructed for this page like every figure in it, takes a 30% deposit when an order is placed and the balance on delivery five months later. Orders have run at US$2.5m a month. The deposit rate and the lead time belong to the example. In US$m:

Deposits a month, steady 2.5 × 30% = 0.75

Balance held, steady 0.75 × 5 months = 3.75

Orders fall to 1.5 a month for five months:

Deposits a month 1.5 × 30% = 0.45

Balance after five months 0.45 × 5 = 2.25

Cash absorbed 3.75 − 2.25 = 1.50

For those five months the profit and loss account hardly moves: the business is still delivering vans ordered at the old rate, so revenue holds near US$2.5m a month. The bank balance absorbs the full US$1.5m in the same months. The slowdown reaches revenue only from the sixth month, after the cash has gone.

The same balance changes the leverage reading. At its year-end the builder owes its bank US$9.0m, holds US$5.0m of cash and reports EBITDA of US$4.0m:

Net leverage, all cash counted: (9.0 − 5.0) ÷ 4.0 = 1.00×

Net leverage, deposits set aside: (9.0 − 1.25) ÷ 4.0 = 1.94×

cash 5.0 − deposits 3.75 = 1.25

Neither figure is wrong. The first assumes orders will keep coming at the old rate; the second treats the cash as the customers' until their vans are delivered. A lender's own reading usually sits between them, and the facility agreement decides which one the covenant tests.

// 04 — HOW IT DIFFERS FROM THE BALANCES BESIDE IT

A prepayment is the mirror of a contract asset: one is cash received for work not yet done, the other is work done that cannot yet be billed. A contractor can carry both on different jobs, each contract shown net. Prepayments also differ from debt-like items. A deposit the customer can demand back, on cancellation or at will, is closer to borrowing, and a desk may count it as debt. The wider balance is first a source of working capital and an obligation to perform. When a business is sold, buyer and seller often argue over which side of that line deferred income falls, because it changes the price through normalised working capital or through net debt.

DEFINED IN ONE PARAGRAPH → · CONTRACT ASSETS → · NORMALISED WORKING CAPITAL →

// 05 — WHERE IT DECIDES A FILE

Order intake becomes the number to watch. A lender to a prepaid business asks for orders taken and the deposit balance in the monthly pack, because they move months before revenue does. It sizes a working capital line for the month the deposits unwind, the moment a business is least able to ask for more.

The document carries the same reading. A lender may refuse to net cash matched by prepayments in a leverage covenant, add a liquidity covenant that counts only cash beyond the deposits, or value its security on the basis that a buyer inherits the prepaid orders. A business that argues its cash is its own has to show that orders have held through a slow season.

HOW BANKS ASSESS A WORKING CAPITAL REQUEST → · THE CASH NETTING CAP →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Law Commission of England and Wales, Consumer Prepayments on Retailer Insolvency (Law Com No 368, 2016) — project page — Records that consumers who prepay are unsecured creditors near the bottom of the order of repayment and often receive nothing — section 01 and the questions.
Australian Accounting Standards Board, AASB 15 Revenue from Contracts with Customers (compiled, applicable to periods beginning on or after 1 January 2023), the Australian text of IFRS 15 — paragraphs 63 and 106 — Requires a contract liability where payment is made or due before transfer, and allows the financing component to be ignored where the gap between payment and transfer is a year or less — section 02.

// QUESTIONS PEOPLE ASK

Is deferred revenue a liability or an asset?: A liability. The business has the cash but owes the customer the goods or service, and until it delivers it has not earned the money. When it performs, the liability is released into revenue. The cash it received is the asset; deferred revenue is the obligation that came with it. Under the international standard and its New Zealand and Australian versions the balance is presented as a contract liability, and UK accounts follow a similar model from 2026.
Is deferred revenue included in working capital?: In the accounts it is a current liability, so it reduces working capital, and a business with large prepayments can run with negative working capital. Analysts and lenders differ on whether to treat it as working capital or as something closer to debt. A lender usually reads it as operating funding that must be renewed by new orders, and a buyer of a business negotiates whether it sits in the working capital target or in net debt.
Is a customer deposit the same as deferred revenue?: Often, but not exactly. A deposit is a part payment in advance, and in the accounts it is usually part of deferred income or contract liabilities. The difference that matters to a lender is refundability. A deposit the customer can reclaim on demand or on cancellation behaves like borrowing and may be counted as debt. A non-refundable payment for work to come is an obligation to perform rather than to repay.
What happens to customer deposits if a business goes into liquidation?: In general the customer becomes a creditor for the amount paid, and unless the money was held on trust or protected by a sector rule, an unsecured one who ranks behind secured lenders. The Law Commission found in 2016 that consumers in England and Wales who prepay often recover nothing. A customer who paid by card may have a separate claim through the card issuer, depending on the card and the market. A buyer of the business may choose to honour orders, but is not obliged to.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Transaction bankerSells and structures the plumbing a business runs on — accounts, payments, collections, liquidity and trade finance.
Personal bankerThe bank's face in a branch or on a phone: everyday accounts, cards, personal lending and the first conversation about a home loan.
Operations analystRuns the processing every product depends on — payments, onboarding, settlements, servicing — at volume.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE BORROWER · EARNINGS

A distributor's reported EBITDA is US$5.1m. The CFO's bridge adds back three items.

Reported EBITDA: US$5.1m
Restructuring: US$0.9m · third year running
Legal settlement: US$0.3m · first in ten years
Owner's pay above market: US$0.2m

What EBITDA do you lend against?

6 MORE ON THE BORROWER · EARNINGS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHCustomer prepayments (deferred income) What are customer prepayments, and how does a lender read them?