Lesson 4 of 8
Paid, not earned
Deferred revenue is a liability that is usually good news. Microsoft carried $75,712 million of it against $331,839 million of annual revenue.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Cash received before the work is done is a liability, not revenue, because the company still owes something.
- It is the only liability on a balance sheet that will be settled with effort rather than money.
- A large and growing deferred revenue balance is usually a strength, which makes it the one liability worth wanting.
The second timing case runs the other way. Money arrives, and the obligation it created has not yet been discharged.
Accounting refuses to call that revenue. The cash is real and the company has promised something in exchange, so the balance sheet records the promise.
Microsoft's unearned revenue against a year of sales
- Revenue for fiscal 2026$331,839m
- Unearned revenue at 30 June 2026, current and long term$75,712m
The entry, and the unwind
Cash received in advance is debited to cash and credited to deferred revenue, sometimes called unearned revenue or a contract liability. No revenue is recognised and profit does not move.
As the work is delivered, deferred revenue is debited and revenue is credited. Cash does not move at that point. The liability turns into revenue in instalments over the life of the obligation.
That is why a company with a large deferred revenue balance can report growing revenue in a quarter where it sold very little: it is recognising work that was sold and paid for earlier.
The figures, from a filing
Microsoft's fiscal 2026 10-K, filed on 29 July 2026, reports current unearned revenue of $72,965 million (Microsoft Corporation FY2026 10-K, accession 0001193125-26-323660) and a long-term portion of $2,747 million (Microsoft Corporation FY2026 10-K, accession 0001193125-26-323660) at 30 June 2026. That is $75,712 million together, against revenue for the year of $331,839 million (Microsoft Corporation FY2026 10-K, accession 0001193125-26-323660).
The current balance alone is 22.0 percent of a year's revenue. At the previous year end the current balance was $64,555 million, so it grew by $8,410 million, and every dollar of that growth was cash collected for work not yet done.
Why a liability can be the best line on the page
This is the structural reason subscription and maintenance businesses generate cash ahead of profit. It is not an accounting trick and it is visible in the accounts of anyone who does it.
The caution is symmetric. Deferred revenue is an obligation to perform, and a company that has taken cash for work it cannot deliver has a real problem sitting in a line labelled as a liability. It is also a claim ahead of shareholders if things go badly, because the customer has already paid.
What to check in the note
Two disclosures are worth finding, and both are required under ASC 606.
How much of the opening balance was recognised as revenue during the year, which tells you the speed of the unwind. And the remaining performance obligations, which is the total already contracted and not yet recognised, including amounts not yet billed. The second is often much larger than the balance sheet figure and is the closest thing in a filing to contracted future revenue.
Check yourself
A customer pays for a three-year subscription in advance. What is recognised on day one?
- The full amount as revenue
- Cash as an asset and the same amount as a liability, with no revenue and no profit
- One third as revenue
Show the answer
Answer: B.
Nothing has been delivered. Revenue is recognised as the service is provided, and the liability falls in step with it.Why is deferred revenue unlike other liabilities?
- It never has to be settled
- It is settled by doing work rather than by paying money
- It carries interest
Show the answer
Answer: B.
The cash has already been received. What remains is an obligation to perform, which is why a growing balance usually accompanies strong cash generation.Company A has receivables of 250 and deferred revenue of 20. Company B has 40 and 300. Same revenue. What differs?
- Company A is more profitable
- Company A funds its customers and Company B is funded by them, so growth consumes cash for one and releases it for the other
- Nothing, since revenue is the same
Show the answer
Answer: B.
The working cycle runs in opposite directions. Profit can be identical while the cash consequences of growth are the reverse of each other.Sources
- Microsoft Corporation, FY2026 Form 10-K, filed 29 July 2026, accession 0001193125-26-323660, for current and long-term unearned revenue at 30 June 2026 and 30 June 2025, and revenue for fiscal 2026.
- ASC 606, Revenue from Contracts with Customers, on contract liabilities, the disclosure of revenue recognised from the opening contract liability balance, and remaining performance obligations.
What this leaves out
- The Microsoft figures are history, read from the statements filed for those fiscal years. They are not a statement about the company today and not a view on any security.
- The two-company table uses invented round numbers so the working cycle can be checked by hand.
- Deferred revenue is presented under several names across filings, including unearned revenue, contract liabilities and customer deposits, and the split between current and long term follows the expected timing of delivery.
- Nothing here is advice about any security.