Deferred revenue, also commonly referred to as unearned revenue, represents funds that a business has received in advance of delivering goods or services. In accounting, it is classified as a liability on the company's balance sheet because it reflects the obligation to provide a product or service in the future. For example, if a software company receives an annual subscription payment upfront, but provides the software service over the span of the year, the received amount is categorized as deferred revenue until it is earned. Each month, as the company delivers the service, a portion of the deferred revenue is recognized as actual revenue in the financial statements.

Deferred revenue plays a key role in ensuring that financial records accurately reflect the timing of earnings in relation to the actual fulfillment of services or delivery of products. A proper accounting of deferred revenue is critical for compliance with financial reporting standards and for providing stakeholders with an accurate view of the company's financial status. For instance, a balance sheet reconciliation may include verifying the proper categorization and recognition of deferred revenue over time.

Companies with recurring revenue streams often deal extensively with deferred revenue, making it a vital concept in their financial management practices. Tools such as Easy Month End can aid in managing these accounting processes efficiently.