When the cash arrives first
Earlier in this rung you nailed down the core idea of revenue recognition: a sale counts when you have done what the customer paid for, not when the money lands. Most of that discussion quietly assumed the cash came *after* the work — you delivered, then waited to be paid, which is the world of receivables. This guide flips the timeline. What happens when the customer pays you *before* you have lifted a finger? You have their cash in hand, but you have not earned a cent of it yet. That gap is the whole subject here.
The cash you collect early is not yet yours to call revenue, because you still owe the customer something — a year of streaming, a haircut, a sofa not yet delivered. Accounting names that debt [[unearned-revenue|unearned revenue]] (also called deferred revenue), and it is a liability, not income. It sits on the performance obligation you took on the moment you accepted the money: a promise to perform that you have not yet kept. If you closed the business tomorrow, you would have to hand much of that cash back. A liability is exactly an obligation like that, so unearned revenue belongs on the right-hand side of the books with the other things you owe.
Subscriptions, gift cards, and deposits
Unearned revenue is everywhere once you look for it, and it wears three common disguises. A subscription is the classic: a software firm collects $1,200 for a year of service up front. A deposit is the partial cousin: a furniture shop takes $300 down on a $900 custom couch, owing both the couch and, until it is built, the deposit. And a gift card is the strangest of the three — the store takes your $50, owes you $50 of merchandise it cannot yet name, and records the whole sum as a liability until you walk in and spend it. In each case money has changed hands but the promise is still open.
Because the promise is usually kept within a year, unearned revenue almost always lands among the current liabilities — the things a company expects to settle (here, by performing) within its normal operating cycle. A magazine publisher with millions of annual subscribers can carry an enormous unearned-revenue balance: it is one of the healthiest liabilities a business can have, because customers have voluntarily prepaid for goodwill the company has not yet delivered. It signals demand, not distress. But it is still a debt of service owed, and the income statement must wait until that service is actually rendered.
Earning it down, month by month
So how does a liability turn into revenue? Slowly, as you perform. Take the software firm's $1,200 annual plan, paid on January 1st. On that day it records $1,200 of cash and $1,200 of unearned revenue — no income at all. Then, at the end of each month, it has delivered one-twelfth of the year's service, so it moves $100 out of the liability and into earned revenue. After January the liability reads $1,100; after June, $700; by December 31st the liability is zero and the full $1,200 has become revenue, spread evenly across the twelve months it was actually earned. This monthly transfer is precisely the kind of adjusting entry you met in the adjustments rung — the bridge that aligns the books with reality at period end.
Jan 1 Customer prepays the annual plan
Dr Cash ................... 1,200
Cr Unearned revenue ........ 1,200 (a liability, not income)
End of each month Deliver 1/12 of the service
Dr Unearned revenue ....... 100
Cr Revenue .................. 100 (earned now, at last)
Unearned-revenue balance as the year is earned down:
After Jan ... 1,100 After Jun ... 700
After Mar ... 900 After Dec ... 0 (fully earned)The gift card adds one honest wrinkle. Some cards are never redeemed — lost in a drawer, forgotten forever. That unredeemed slice is called *breakage*, and a company cannot keep it parked as a liability indefinitely once experience shows the cards will not come back. Standards let it recognize that expected breakage as revenue gradually, in proportion to the cards customers *do* redeem. The point to carry away is not the mechanics but the discipline: even a liability is recognized into revenue only on a defensible estimate of how the promise will actually be settled, never by wishful rounding.
Trade discounts: the price you never write down
Now to the second half of the title: [[credit-terms-and-discounts|credit terms and discounts]], the fine print that decides what number revenue actually equals. The first kind is the trade discount — a reduction off a published list price, given because a buyer is a reseller, a bulk purchaser, or a favoured account. A catalogue lists a machine at $10,000 but a wholesale customer gets 30% off. Here is the key point that trips people up: the trade discount is never recorded anywhere. You do not book $10,000 of revenue and a $3,000 discount; you simply book the sale at $7,000. The list price was only ever a starting point for haggling — the $7,000 is the real, agreed price, and that is the revenue.
Why does it never appear? Because revenue is measured at the amount the seller actually expects to be entitled to — the consideration the two sides agreed on. The list price was a fiction the moment a discount was negotiated, so recording it would inflate both revenue and a phantom discount account by the same $3,000, telling the reader nothing true. Contrast this with the cash discount we meet next, which *does* get recorded, and you can already feel the dividing line: a trade discount happens *before* the price is set, so it shapes the price silently; a cash discount happens *after*, as a reward for paying quickly.
Cash discounts and the terms shorthand
A cash discount is a small reward for paying an invoice early. You will see it written as terms like "2/10, net 30": pay within 10 days and take 2% off; otherwise the full amount is due in 30 days. Sell $1,000 of goods on those terms and the buyer can settle for $980 if they pay by day 10, or owes the whole $1,000 if they wait. From the seller's side, that 2% is a genuine cost of getting paid sooner; from the buyer's side, declining it is surprisingly expensive — skipping a 2% discount to hold cash for 20 extra days works out to an annualized rate well above what any bank would charge, which is why finance-savvy buyers almost always take the discount.
Unlike a trade discount, a cash discount *is* recorded — because at the moment of sale you do not yet know whether the customer will take it. Under today's standards the cleaner approach is to estimate it up front: if experience says most customers pay early, you book revenue and the matching [[accounts-receivable|accounts receivable]] net of the expected discount, recognizing that you probably will not collect the full sticker amount. If a buyer then surprises you by paying late and forfeiting the discount, the extra 2% is picked up as a small adjustment. The principle echoes the net realizable value thinking from the receivables guide: you carry the receivable at what you realistically expect to collect, not at an optimistic gross figure.