Plenty of businesses get paid before they deliver: event planners take retainers months ahead, trades collect deposits to book a job, coaches sell packages up front, software and services bill annually in advance. The cash is real and it's in the bank. The tempting conclusion — "money in equals revenue" — is where the bookkeeping goes wrong.

Under accounting standards, revenue isn't about when cash arrives; it's about when you've earned it by delivering the goods or performing the service. A deposit for future work is not a sale yet. It's deferred revenue — a liability — because if you didn't show up, you'd owe it back. Only when you deliver does it convert into revenue.

TL;DR — The Short Version
  1. Revenue is recognized when it's earned, not when cash is received. Under ASPE 3400, you record revenue as you perform the work.
  2. A deposit or prepayment is a liability — "deferred" or "unearned" revenue — until you deliver. You owe the service; you haven't earned the money.
  3. Booking deposits as revenue overstates the current year and leaves a future period with costs but no matching revenue — a distorted, misleading picture.
  4. It can also cost you tax timing. Recognized revenue is income; pull it forward and you may pay tax sooner than necessary on money you haven't earned.
  5. The fix is simple: record deposits to a deferred-revenue liability, then move them to revenue as the work is done.

Read on for what "earned" means, why the timing matters, the tax wrinkle, a real example, and how to record it.

The Principle

Earned, not received

Accrual accounting separates cash movement from economic activity. Under ASPE Section 3400, revenue from services is recognized as the service is performed (and revenue from goods when the significant risks and rewards have transferred to the buyer) — when you've done the thing you were paid to do. Receiving cash early doesn't satisfy that; it just means you're holding money for work still owed.

That's why a deposit sits on the balance sheet as a liability called deferred revenue (or unearned revenue). It captures a real obligation: until you deliver, that money isn't yours to call profit — a cancellation could require you to return it. When you perform the work, the liability is drawn down and the matching amount becomes revenue on the income statement.

Source: CPA Canada Handbook, ASPE Section 3400, Revenue (Deloitte IAS Plus summary).

A deposit received is recorded as cash and a deferred-revenue liability, not as revenue. When the work is delivered, the liability is reduced and revenue is recognized at that point. A DEPOSIT'S JOURNEY — CASH NOW, REVENUE LATER Deposit received Dr Cash / Cr Deferred revenue → Sitting as a liability deferred revenue (you owe the work) → Work delivered Dr Deferred rev / Cr Revenue The mistake: jumping straight from "deposit received" to "Revenue" — skipping the liability. It books profit in the wrong year and leaves the delivery year with costs but no revenue.
Cash and revenue are two different events. The deferred-revenue liability is the bridge between them.
Why Timing Matters

The distortion runs in both directions

Recording deposits as revenue doesn't just misplace a number — it warps two years at once. The year you collect looks more profitable than the business actually was, because you've claimed income for work not yet done. The year you deliver looks worse than reality, because you incur the labour, materials, and overhead to do the work but the revenue was already booked and gone. Your statements stop telling you whether the business is actually making money.

That matters beyond tidiness. Decisions get made on those numbers — pricing, hiring, drawings, whether you can afford something. A year inflated by deposits can lead you to spend money that was never really profit, and a delivery year that shows a phantom loss can spook you out of good moves.

The Tax Wrinkle

It can pull your tax forward, too

Because recognized revenue feeds taxable income, calling a deposit "revenue" early can mean paying tax on it before you've earned it. (The tax rules have their own treatment of advance payments — amounts received for future services are generally included in income when received, but a reserve can often be claimed for the part not yet earned, so the tax result can track the proper accounting more closely than the mistaken version does.) Either way, the cleanest path is to recognize revenue as you earn it — your statements stay honest and your tax follows the real economics rather than the timing of a deposit.

Source: Income Tax Act, s. 20(1)(m) (reserve for goods/services not yet delivered), with advance payments included under s. 12(1)(a). For the accounting treatment, ASPE Section 3400.

A Real-World Example

The event planner whose best year wasn't real

Meet Mei, who runs Atelier North Events, a boutique event-planning company in Calgary, Alberta. Weddings and corporate galas book far in advance, so Mei collects large retainers and deposits — often a year ahead. In 2025 she takes in $120,000 of deposits for events that will actually happen in 2026. Her bookkeeping records every deposit as revenue the day it arrives.

On paper, 2025 is a blockbuster — revenue is way up, profit looks fantastic, and Mei pays corporate tax accordingly. Feeling flush, she takes larger draws and signs a lease for a bigger studio.

Then 2026 arrives — and so do the events. Mei spends heavily on venues, staff, florals, and rentals to deliver the weddings she was paid for last year. But the revenue was already booked in 2025. So 2026 shows all the costs with almost none of the matching revenue — a steep, scary-looking loss, even though the business is doing fine.

The same $120,000, two ways
Wrong: all booked as 2025 revenue2025 inflated · 2026 shows costs, no revenue
Right: deferred in 2025, recognized in 2026 as events occureach year matches revenue to its costs
Same cash, same events. Only the timing of recognition changes — but it changes the entire story each year tells, and when tax is paid.

Mei's "record year" was mostly money she still owed in service. The blockbuster was an accounting illusion — and she'd spent against it.

Handled correctly, the $120,000 sits as deferred revenue at the end of 2025 and becomes revenue in 2026 as each event is delivered — landing right alongside the costs of delivering it. Both years tell the truth, Mei's tax follows the real timing, and she doesn't over-draw against profit that hadn't been earned.

What should have happened

Quick Check

Are your deposits handled right?

Getting revenue timing right keeps your statements honest enough to actually run the business on — and keeps your tax aligned with reality. It's part of what's included in every CDL plan, and you can estimate the cost in about a minute.

The Bottom Line

Cash in the bank, work still owed

A deposit feels like a win, and it is — but it's not a sale until you've done the work. Treat it as deferred revenue, recognize it as you earn it, and your financials will show what the business actually made each year instead of a sugar high one year and a hangover the next. The money was always going to be yours; recording it correctly just stops it from lying to you in the meantime.

Taking deposits for work you deliver later?

If those deposits are hitting your books as revenue, your best year might not be real — and your tax timing could be off. A 20-minute call is enough to check how your revenue is recognized.

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This article is for informational purposes only and does not constitute accounting or tax advice. ASPE revenue recognition and the tax treatment of advance payments contain detail and exceptions and change over time, and the figures above are illustrative. Consult a qualified professional for your situation.

References

Primary and authoritative sources. The ASPE standard itself lives in the CPA Canada Handbook (subscription); the summary below is a free public explanation. The Income Tax Act link opens on the official Justice Laws website.