Which statement best describes cash receipts and unearned liabilities?

Which statement best describes cash receipts and unearned liabilities?

• A. Cash is received before services performed and liability is created
• B. Cash is received after services rendered and revenue is earned
• C. Cash is never involved
• D. Cash receipt creates an asset only

Answer: (A)

When cash is received before the company has performed the service, it creates a future obligation to provide that service. That obligation is a liability, commonly called unearned revenue, and it sits alongside the asset of cash on the books. The cash receipt increases an asset (cash) and creates a corresponding liability (unearned revenue) because the company still owes the customer the service or goods. As performance occurs, the company reduces the liability and recognizes revenue. This is why the statement that cash is received before services are performed and a liability is created best describes cash receipts tied to unearned liabilities. The other scenarios either ignore the liability created by advance cash, or pretend cash-collection alone makes revenue without fulfilling the service or goods obligation.

When cash is received before the company has performed the service, it creates a future obligation to provide that service. That obligation is a liability, commonly called unearned revenue, and it sits alongside the asset of cash on the books. The cash receipt increases an asset (cash) and creates a corresponding liability (unearned revenue) because the company still owes the customer the service or goods. As performance occurs, the company reduces the liability and recognizes revenue. This is why the statement that cash is received before services are performed and a liability is created best describes cash receipts tied to unearned liabilities. The other scenarios either ignore the liability created by advance cash, or pretend cash-collection alone makes revenue without fulfilling the service or goods obligation.