Create a current liability account (for example "Income in Advance"), code the annual invoice to that account with GST on Income, then post a monthly journal that moves one-twelfth of the ex-GST amount from the liability to your revenue account, using the BAS Excluded tax rate. GST is reported once, on the invoice. At year end, the liability balance should match a schedule of unearned income by customer.
Key takeaways
- Xero doesn't defer subscription revenue automatically. You need a liability account and monthly journals, or an add-on that posts them.
- Code the invoice to the liability with GST on Income, so the GST still lands on your BAS when you invoice or are paid.
- Release revenue with a repeating manual journal using BAS Excluded, so GST isn't counted twice.
- Reconcile the liability to a customer-by-customer schedule every month end and at 30 June.
- Your books and your tax return can treat prepaid income differently. Check the tax position separately.
When a business moves customers to annual plans, the first thing that breaks is the monthly profit and loss.
One month looks brilliant because 40 customers renewed. The next looks terrible because nobody did. Neither is true. You earned roughly the same amount in both months, because you delivered roughly the same service.
That's what deferred revenue (also called unearned revenue or income in advance) fixes. This guide shows how to set it up in Xero, the way we do it for clients at BPAG Accountants. It's written for owners and bookkeepers, and it assumes you're registered for GST.
What deferred revenue is
When a customer pays upfront for 12 months of service, you haven't earned that money yet. You owe them 12 months of service. Until you deliver it, the unearned part is a liability on your balance sheet.
Each month, as you deliver the service, one-twelfth of the payment moves from that liability into revenue on your profit and loss.
Australian Accounting Standard AASB 15 calls this liability a contract liability. Most small businesses just call it "income in advance".
Step 1: Add an "Income in Advance" liability account
In Xero, go to your Chart of accounts and add a new account:
- Account type: Current Liability
- Code: something in your liability range, for example 840
- Name: Income in Advance (or Unearned Revenue)
- Tax: BAS Excluded
If you sell several kinds of prepaid service (memberships, retainers, support plans), you can add one account per type. It makes the month-end reconciliation easier.
Step 2: Code the annual invoice to the liability
When you issue the annual invoice (or your billing system pushes it to Xero), code the line to Income in Advance, not to sales. Keep the tax rate as GST on Income.
That does two things at once:
- The ex-GST amount goes to the liability, not your profit and loss.
- The GST is still reported on your BAS at the right time, because Xero reports GST based on the tax rate on the transaction, not the account type.
Example. A customer pays A$1,188 (GST-inclusive) on 1 July for 12 months.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable (or bank) | A$1,188 | |
| Income in Advance (liability) | A$1,080 | |
| GST | A$108 |
The A$108 of GST goes on the BAS for the period you invoiced or were paid, depending on whether you report GST on a cash or non-cash basis. It doesn't get spread over the year. Our GST on subscriptions guide explains why.
Step 3: Release the revenue each month
Now post a manual journal each month moving the earned portion into revenue:
| Account | Debit | Credit |
|---|---|---|
| Income in Advance (liability) | A$90 | |
| Subscription Revenue (income) | A$90 |
Use BAS Excluded on both lines. The GST has already been reported on the invoice, and you don't want to report it again.
In Xero you can make a manual journal repeat monthly, which suits a single large contract. For many customers on different start dates, it's usually better to post one journal a month for the total released, calculated from a schedule.
Step 4: Keep a schedule and reconcile it
The liability balance in Xero should always equal the total unearned revenue across your customers. Keep a simple schedule:
| Customer | Start | Months | Ex-GST fee | Released to date | Unearned |
|---|---|---|---|---|---|
| Customer A | 1 Jul | 12 | A$1,080 | A$540 | A$540 |
| Customer B | 1 Oct | 12 | A$2,400 | A$600 | A$1,800 |
| Total | A$2,340 |
At each month end, compare the schedule total to the Income in Advance balance on your balance sheet. If they don't match, something was coded wrongly: a renewal that went straight to sales, a refund that wasn't reversed, or a journal that was missed.
Most billing platforms (Stripe, Chargebee and others) can export the data you need, and some offer revenue recognition reports or Xero integrations that post the journals for you. Whatever you use, the reconciliation step doesn't go away.
Want your subscription numbers set up properly?
A BPAG adviser can look at how your billing flows into Xero in a free 30-minute profit review.
Monthly plans: do you need any of this?
Usually not. If customers pay monthly for the month ahead, the timing difference is small, and most small businesses just code the invoice to sales.
You'll want deferral when:
- You sell annual or multi-month plans paid upfront.
- You take prepaid packs, credits or retainers that are used over time.
- Your billing period doesn't line up with your reporting month (for example, billed on the 20th for the next 30 days) and the amounts are material.
Refunds, cancellations and upgrades
- Refund of unused months. Reverse the unearned portion out of the liability with a credit note coded to Income in Advance (GST on Income), so GST is adjusted too (a decreasing adjustment on that period's BAS). Don't credit it against sales.
- Upgrade mid-term. Treat the extra charge as a new amount to defer over the remaining months.
- Free months. If an annual plan includes "two months free", you're delivering 12 months for the price, so release the fee over 12 months, not 10.
- Setup or joining fees. If they pay for something you deliver at the start, they may be recognised then. If they don't deliver a distinct service, AASB 15 may require you to spread them. Check with your accountant.
Cash basis vs accruals in Xero
Xero lets you report your BAS on a cash or accruals basis, and you can run your profit and loss either way. Deferred revenue only makes sense in accrual reports. If you look at a cash-basis profit and loss in Xero, the annual payment will still appear in the month the money arrived.
Your books vs your tax return
Recording deferred revenue properly in Xero gives you accurate management accounts. It doesn't automatically decide when the income is taxable.
For tax, the question is when the income is derived. For accruals-basis businesses providing a genuine service over time, prepaid fees may be derived as they're earned, under the Arthur Murray principle, but the ATO's view is that this depends on there being a contingency of repayment. We explain this in prepaid subscription income and tax. Your tax agent may need to make adjustments at year end.
Month-end checklist
- All annual and prepaid invoices coded to Income in Advance, with GST on Income.
- Monthly release journal posted, BAS Excluded.
- Schedule updated for new customers, renewals, refunds and upgrades.
- Income in Advance balance agrees to the schedule.
- GST on prepaid invoices appears on the BAS for the right period.
- Monthly recurring revenue reported separately from cash received, so you can see both.
Free Subscription Profit Review
Australian business owners can book a free 30-minute review with a BPAG Accountants adviser. An honest conversation about:
- whether a subscription model could work for your business
- how recurring revenue could cover your fixed costs each month
- how it could lift what your business is worth
No cost, no obligation. General information only until we understand your situation.
Frequently asked questions
Does Xero automatically handle deferred revenue?
Not on its own. Xero records an invoice in the account you code it to. To defer revenue, you code the invoice to a liability account and post journals to release it. Some billing platforms and add-ons can post those journals for you, but you still need to reconcile the liability.
What tax rate should I use on the release journal?
BAS Excluded. The GST was reported when you raised the invoice coded to the liability with GST on Income. Using a GST tax rate on the journal would count the GST twice.
What should I call the account?
Common names are Income in Advance, Unearned Revenue and Deferred Revenue. In AASB 15 terms it's a contract liability. Make it a Current Liability, because the service is usually delivered within 12 months.
Can I just do one adjustment at 30 June?
You can, and many small businesses do. A year-end adjustment gets the annual accounts right, but your monthly reports will still swing around during the year. Monthly journals give you a profit and loss you can manage the business with.
Does deferring revenue in Xero reduce my tax?
Not by itself. Accounting records don't decide when income is taxable. Whether prepaid income can be deferred for tax depends on the tax law and your facts. Talk to your tax agent.
Important: This is general information only, current as at 29 October 2026. It is not tax, legal or financial advice and doesn't take into account your objectives, financial situation or needs. Tax law is complex and changes often, and the right answer depends on your facts. Before acting, get advice from a registered tax agent. BPAG Accountants can help: bpag.net.au or 1300 272 422. Where we quote thresholds and rates, check the linked ATO source for the income year that applies to you.
Talk it through with a BPAG adviser
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Written by BPAG Accountants
This guide was written by the tax team at BPAG Accountants, a Sydney accounting firm that helps Australian business owners with tax, structuring, cash flow and business advice. Reviewed by Robert Coorey, a Director at BPAG and author of The Subscription Playbook. Talk to BPAG on 1300 272 422 or at bpag.net.au.
Sources and further reading
- AASB 15 Revenue from Contracts with Customers (compiled), Australian Accounting Standards Board
- ATO, Choosing an accounting method (GST cash and non-cash basis)
- ATO, TR 2014/1 (when prepaid fees are derived; applies Arthur Murray)
- Xero Product Ideas: Automatically allocate subscription sales into unearned and earned income (shows this isn't built in)
Sources checked 29 October 2026. Spotted something out of date? Tell us.