What does deferred revenue represent?

Deferred revenue signifies advance payments made by customers for goods or services that have not yet been delivered or performed. When a company receives payment upfront for future services or products, it recognizes this payment as a liability on its balance sheet, reflecting the obligation to fulfill the promise of delivery. This accounting treatment aligns with the revenue recognition principle, which states that revenue should only be recognized when it is earned, meaning that the service or product has been provided to the customer.

In contrast, payments not yet received do not represent deferred revenue, as this term specifically pertains to payments that have already been made but for which the associated performance obligation remains unfulfilled. Similarly, revenue that has been earned is recognized in the income statement, while deferred revenue has not yet been earned, and future sales forecasts do not impact the current financial statements in the context of deferred revenue. Thus, advance payments for goods or services not yet provided accurately captures the essence of deferred revenue.