Cash collected for amounts not yet revenue is accounted for as what on the balance sheet, and when does it become revenue?

• A. Deferred revenue on the balance sheet; it becomes revenue when realized
• B. Receivable; it becomes revenue when collected
• C. Prepaid expense; it becomes revenue when earned
• D. Revenue recognized immediately

Answer: (A)

When cash is collected before the company has earned the revenue, it is recorded as a liability on the balance sheet called deferred revenue (also known as unearned revenue). This conveys that the company still owes goods or services to the customer. Revenue is recognized only when the performance obligation is satisfied—when the goods are delivered or the service is performed. At that moment, the liability is reduced and the revenue is recognized, i.e., it becomes revenue when earned (realized). The other options don’t fit: a receivable would imply revenue is earned but not yet collected, a prepaid expense is an asset for future benefits, and revenue cannot be recognized immediately before the obligation is fulfilled.