Deferred revenue represents payments received by a company in advance of delivering its goods or performing its services. These deferred revenues are accounted for on a company's balance sheet as a liability. Deferred revenue is classified as a liability because the customer might still return the item or cancel the service.

Since the good or service has not been delivered or performed, a company still technically owes its customer the promised good or service, and the revenue cannot yet be considered earned. Upon delivery of the good or performance of the service to the customer, the deferred revenue is reduced by the amount of the good or service and reclassified as an asset. Deferred revenue is an accrual account used to accurately report a company's balance sheet.

Following are two examples of a company's deferred revenue turning into earned revenue:

- A magazine company requires yearly payment for a monthly magazine subscription, and then earns a portion of the deferred revenue as a monthly subscription. If the magazine company sells a monthly subscription at a single payment of $12 a year, the company earns a deferred revenue of $1 for each month it delivers a magazine to its customers.

- A software company offers a software as a service product and requires a yearly payment to subscribe to its service. Each month, the company earns one-twelfth of its deferred revenue.