What is 'deferred revenue'?

Deferred revenue refers to funds that a business has collected but has not yet earned because the associated product or service has not yet been delivered to the customer. This situation typically arises in subscription-based services, advance ticket sales, or prepaid contracts where customers pay for goods or services upfront. Until the company fulfills its obligation to provide the service or product, that revenue cannot be recognized in the financial statements.

This accounting treatment ensures that revenue is matched with the period in which it is earned, aligning with the revenue recognition principle. Therefore, deferred revenue is recorded as a liability on the balance sheet until the organization delivers the product or service, at which point it is recognized as earned revenue.

The other options do not accurately describe deferred revenue. For instance, earned revenue is recognized after delivery, a type of long-term investment does not apply here, and funds raised through equity financing are related to ownership stakes, not revenue.