Receiving cash from customers before services are performed results in:

Question

BlackTom AI · Accepted Answer

Consider the scenario described: cash is received from customers before the related services are performed. This timing affects how the transaction is categorized in accounting.
Option 1: Prepaid Assets. While this account is used when cash is paid in advance for goods or services, the key distinction here is who pays and when. Receiving cash from customers creates a liability for future performance, not an asset that the company has prepaid for itself. So this option mislabels the nature of the transaction.
Option 2: Service Revenue. Revenue is recognized when the service is performed or the performance obligation is satisfied, not simply when cash is received in advance. Recording revenue at the time of cash receipt would overstate earnings before the service is delivered, which violates the revenue recognition principle. Therefore this choice is incorrect.
Option 3: Deferred Revenues. This option correctly captures the liability created by receiving cash before fulfilling the service. The company owes the customer the service or goods promised, so the cash is recorded as a liability called Deferred Revenues (or Unearned Revenue) until the performance obligation is satisfied.
Option 4: Accounts Receivable. Accounts Receivable represents amounts billed to customers for services already performed or goods delivered but not yet collected in cash. Receiving cash before performing services does not create an receivable; instead, it creates a liability to perform in the future. Hence this option is not appropriate for this situation.
In summary, the core idea is that the advance cash creates a liability rather than revenue or an asset, until the service is delivered. This aligns with the concept of recognizing deferred revenues as a liability until performance occurs.

Receiving cash from customers before services are performed results in:单项选择题

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