What is an unearned (deferred) revenue?

• A. Revenue recognized when goods are produced, regardless of cash receipt.
• B. Cash received before performance; liability; revenue recognized as performance occurs or over time.
• C. Liability recognized only when the service is performed.
• D. Asset recorded when cash is received.

Answer: (B)

Unearned revenue is cash received before you have performed the service or delivered the goods. Because you haven’t earned it yet, that money sits as a liability on the books—the obligation to provide the product or service in the future. Revenue is only recognized when you satisfy that obligation, either at a single point in time or over a period of time.

So the correct idea is that cash received before performance creates a liability (unearned revenue), and revenue is recognized as performance occurs. For example, if you’re paid in advance for a year of service, you record the cash as an asset and a corresponding unearned revenue liability, and then gradually move it from liability to revenue as you deliver the service each period.