Which of the following best describes unearned revenues?

• A. Liabilities representing cash received before services are performed
• B. Expenses that have been incurred but not yet paid
• C. Revenues that have been earned but not yet received in cash
• D. Assets representing future economic benefits

Answer: (A)

Verified step by step guidance

1. Understand the concept of unearned revenues: Unearned revenues are amounts received in advance from customers for goods or services that have not yet been provided. These are considered liabilities because the company has an obligation to deliver the goods or services in the future.
2. Analyze why unearned revenues are classified as liabilities: Since the company has received cash but has not yet performed the service or delivered the goods, it owes the customer either the service or a refund. This obligation makes unearned revenues a liability.
3. Compare unearned revenues to other options provided: Unearned revenues are not expenses incurred but not paid, as those are accrued expenses. They are also not revenues earned but not received in cash, as those are accounts receivable. Lastly, unearned revenues are not assets, as they do not represent future economic benefits but rather obligations.
4. Relate unearned revenues to the accounting equation: Unearned revenues increase liabilities on the balance sheet when cash is received, and they decrease liabilities when the service is performed or goods are delivered, at which point the revenue is recognized.
5. Conclude that the correct description of unearned revenues is: 'Liabilities representing cash received before services are performed,' as this aligns with the definition and treatment of unearned revenues in financial accounting.