What does "deferred revenue" refer to?

Deferred revenue refers to payments that a business has received in advance for goods or services that have not yet been delivered or rendered. This concept is essential in accounting because it reflects the obligation of the company to provide these goods or services in the future. Until the company fulfills that obligation, the revenue is considered "deferred" and is recorded as a liability on the balance sheet rather than being recognized as income on the income statement.

When a business receives payment upfront but has not yet delivered the product or performed the service, it cannot count that money as revenue until those goods or services have been provided. This aligns with the revenue recognition principle, which states that revenue should be recognized when it is earned, not necessarily when cash is received. Therefore, the concept of deferred revenue helps ensure that financial statements accurately reflect a company's financial position and performance.