Deferred revenue is money received from a customer for goods or services you have not yet delivered, recorded as a liability until you earn it.
When a customer pays in advance, a retainer, a subscription, a deposit, you have the cash but you have not yet done the work. Under accrual accounting you cannot call it revenue yet, so it sits on the balance sheet as deferred revenue, a liability, until you deliver and earn it.
The tax treatment can differ from the accounting. The CRA generally taxes amounts received, and while a reserve may defer some income, prepaid amounts are often taxable when received even though your statements defer them. This mismatch between book and tax timing is a common area for adjustment on the T2.
A client pays $12,000 upfront for a year of monthly service. You record $12,000 as deferred revenue and recognise $1,000 as earned revenue each month as you perform the work, moving it from liability to income.
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