5. Cash received from customers prior to delivery of services is an example of
Question
5. Cash received from customers prior to delivery of services is an example of
Solution
Cash received from customers prior to delivery of services is an example of "Unearned Revenue" or "Deferred Revenue".
Here are the steps to understand this:
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When a business receives cash from customers before the services are delivered, it cannot recognize this cash as revenue yet. This is because in accrual accounting, revenue is only recognized when it is earned, i.e., when the service is delivered or the product is sold.
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Therefore, this cash is recorded as a liability on the business's balance sheet, not as revenue on the income statement. This is because the business owes a service to the customer, hence it's a liability.
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This type of liability is specifically called "Unearned Revenue" or "Deferred Revenue". It represents the obligation of the business to deliver services or products in the future.
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Once the service is delivered or the product is sold, the unearned revenue is then recognized as revenue on the income statement, and the liability is removed from the balance sheet.
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