Unearned Revenue is described as

• A. Revenue Recognized Before Services Are Performed
• B. A Prepaid Expense
• C. A Current Asset Representing Cash Collected in Advance
• D. A Liability Created When Cash Is Collected in Advance of Providing Services or Delivering Goods

Answer: (D)

Unearned revenue arises when you collect cash before delivering goods or performing services. Under accrual accounting, revenue is earned only when the service is actually performed or the goods are delivered, not when cash is received. So the amount received becomes a liability—the obligation to provide the service or product in the future. As you fulfill the obligation, you reduce the liability and record revenue. It isn’t a revenue item or an asset like a prepaid expense (which represents paying in advance for future benefits). The liability is usually classified as current if the performance is expected within a year; otherwise it’s a long-term liability.