What does 'deferred revenue' represent?

Deferred revenue represents an obligation for a company. It occurs when a business receives payment for goods or services before they have been delivered or performed. This means that, although cash has been received, the revenue is not recognized on the income statement at that time because the service or product has not yet been provided to the customer.

In accounting terms, deferred revenue is recorded as a liability, reflecting the company’s responsibility to deliver the service or goods in the future. Once the services are delivered or the goods are supplied, the deferred revenue is then recognized as earned revenue in the financial accounts, transitioning from a liability to income.

This is a vital concept in accrual accounting, where the recognition of revenue is based on when it is earned rather than when cash is received. Therefore, money received for services not yet performed illustrates why deferred revenue is correctly represented by the third option.