In financial reporting, what does the term 'deferred revenue' indicate?

The term 'deferred revenue' refers to payments that a company has received for goods or services that have not yet been delivered or performed. This is a liability on the balance sheet because, although cash has been received, the obligation to provide the goods or services remains outstanding. Companies need to recognize this revenue only when they fulfill their part of the contract, which aligns with the revenue recognition principle that dictates revenue should be recognized when it is earned.

Deferred revenue is a common practice in industries such as subscription services or prepayment contracts, where payment is made upfront but the service is provided over time. Such accounting practices help ensure that financial statements accurately reflect the company's financial position and performance, as revenues are reported only when they are actually earned.