Which balance sheet item is revenues collected in advance for services not yet performed?

Which balance sheet item is revenues collected in advance for services not yet performed?

• A. Accounts payable
• B. Unearned revenue
• C. Revenue
• D. Accrued expenses

Answer: (B)

When money is collected in advance for services not yet performed, it creates a liability called unearned revenue on the balance sheet. You haven’t earned the revenue yet because you still owe the service to the customer, so you can’t recognize it as revenue on the income statement. As the service is provided over time or at completion, you reduce the unearned revenue and recognize the actual revenue. For example, if a client pays upfront for a service to be delivered over several months, cash increases and unearned revenue increases at the time of payment. Each period as the service is delivered, you recognize revenue and decrease the unearned revenue accordingly. Other items don’t fit because they describe different concepts: accounts payable is what you owe to suppliers, not customers; revenue is the income recognized when earned and sits on the income statement; accrued expenses are expenses incurred but not yet paid, which are expenses liabilities rather than prepayments for services.

When money is collected in advance for services not yet performed, it creates a liability called unearned revenue on the balance sheet. You haven’t earned the revenue yet because you still owe the service to the customer, so you can’t recognize it as revenue on the income statement. As the service is provided over time or at completion, you reduce the unearned revenue and recognize the actual revenue.

For example, if a client pays upfront for a service to be delivered over several months, cash increases and unearned revenue increases at the time of payment. Each period as the service is delivered, you recognize revenue and decrease the unearned revenue accordingly.

Other items don’t fit because they describe different concepts: accounts payable is what you owe to suppliers, not customers; revenue is the income recognized when earned and sits on the income statement; accrued expenses are expenses incurred but not yet paid, which are expenses liabilities rather than prepayments for services.