What is the definition of deferred revenue?

Deferred revenue is recognized as a liability on the balance sheet because it represents money that has been received by a business for goods or services that have not yet been delivered or rendered. In essence, when a company receives payment in advance, it cannot recognize that payment as revenue until it fulfills its obligation to provide the service or product. This is significant for accounting standards, as they require matching revenues with the expenses incurred in the process of generating those revenues.

In this context, the correct answer encapsulates the concept that deferred revenue is not yet earned and reflects an obligation to perform in the future. This obligates the company to provide the associated goods or services, which is why it is categorized as a liability until that service is completed or the product is delivered. The other choices do not accurately describe deferred revenue: payments due from customers signify accounts receivable, cash payments for delivered services indicate recognized revenue, and revenue recognized immediately refers to income that is considered earned and has been realized.