Final answer:
Deferred revenue is reported on the balance sheet as a liability because it represents an obligation to perform a service or deliver goods in the future that has been paid for in advance by customers.
Step-by-step explanation:
Deferred revenue is reported on the balance sheet as a liability. It represents an obligation of the company to perform a service or deliver goods in the future that has been paid for in advance by customers. This liability is recognized because the revenue has not yet been earned by providing the goods or services.
For example, if a company receives payment in advance for a one-year magazine subscription, the amount received would be recorded as deferred revenue on the balance sheet until each issue of the magazine is delivered to the customer.
Other examples of deferred revenue include prepaid rent, prepaid insurance, and gift cards sold by retailers.