Which statement correctly describes unearned revenue?

• A. Cash received before goods/services delivered.
• B. Revenue earned but not yet billed.
• C. Revenue recognized when goods are shipped.
• D. Expense recorded in advance.

Answer: (A)

Unearned revenue reflects a cash receipt before delivering goods or performing services, so it sits as a liability. The concept relies on the idea that revenue is not earned until the company satisfies its performance obligation. When the customer pays upfront, the company records cash and a liability called unearned revenue. As the goods are shipped or the service is performed, the liability is reduced and revenue is recognized.

For example, if a customer pays in advance for a magazine subscription, the company records cash received and unearned revenue. Each month, as issues are delivered, the company recognizes revenue and decreases the unearned revenue liability. If goods or services aren’t delivered yet, revenue isn’t recognized.

Why the other statements don’t fit: revenue earned but not yet billed describes accrued revenue, which is an asset (receivable), not a liability. revenue recognized when goods are shipped pertains to the timing of recognizing revenue, not the initial receipt of cash in advance. an expense recorded in advance refers to a prepaid expense, not unearned revenue.