Multiple Choice
In the context of revenue and expense recognition, using qualitative research for measuring brand equity will:
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3. Accrual Accounting Concepts
Revenue Recognition and Expense Recognition
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Deferred revenue is a(n):
A
expense
B
asset
C
revenue
D
liability
Verified step by step guidance1
Understand the concept of deferred revenue: Deferred revenue refers to money received by a company for goods or services that have not yet been delivered or performed. It represents an obligation to provide those goods or services in the future.
Recognize the classification of deferred revenue: Since the company owes goods or services to the customer, deferred revenue is considered a liability. It reflects the company's obligation to fulfill its promise.
Differentiate deferred revenue from other financial elements: Deferred revenue is not an expense because it does not represent a cost incurred by the company. It is not an asset because it does not provide future economic benefits. It is not revenue because the earnings process is not yet complete.
Relate deferred revenue to the accounting equation: In the accounting equation (Assets = Liabilities + Equity), deferred revenue increases the liabilities side because it represents an obligation.
Conclude the classification: Based on the explanation above, deferred revenue is correctly classified as a liability on the balance sheet until the company fulfills its obligation by delivering goods or services.
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