Fees received but not yet earned is classified as which of the following?

• A. Prepaid expense
• B. Unearned revenue
• C. Accrued revenue
• D. Accrued expense

Answer: (B)

Fees received but not yet earned reflect a future obligation to provide services, so they’re recorded as a liability called unearned revenue. In accrual accounting, revenue is recognized when earned, not when cash is received. So when payment comes in before the service is performed, you debit cash and credit unearned revenue, showing you owe the service to the customer. As you provide the service, you reduce the unearned revenue and recognize revenue.

A prepaid expense would be an asset for money paid in advance for your own future benefit, which isn’t the situation here. Accrued revenue would apply if revenue were earned but not yet received, which isn’t the case since cash has already been collected. Accrued expense would be an expense incurred but not yet paid, which also doesn’t fit this scenario.