When is revenue recognized in relation to unearned revenue?

• A. Revenue is recognized only when cash is received.
• B. Revenue is recognized when the expense occurs.
• C. Revenue is recognized as performance occurs or over time.
• D. Revenue is never recognized for unearned revenue.

Answer: (C)

Revenue recognition for amounts received before delivery happens is driven by when the company satisfies its performance obligation, not by when cash changes hands. When a customer pays in advance, you record a liability called unearned (or deferred) revenue. As you perform the promised service or deliver the product, you recognize revenue and reduce that liability. If the obligation is fulfilled over time, revenue is recognized gradually over the period; if it’s satisfied at a single point, you recognize it then. This is why the correct approach is to recognize revenue as performance occurs or over time.

Cash receipt alone does not trigger revenue in accrual accounting, so revenue isn’t recognized just because cash is received. Revenue isn’t tied to when an expense occurs. And unearned revenue isn’t never recognized—the revenue becomes earned and is recorded as income once the performance obligation is satisfied.