Unearned Revenues are recorded as which type of balance sheet account?

• A. Asset
• B. Revenue
• C. Expense
• D. Liability

Answer: (D)

Unearned revenues arise when cash is received before the company has provided the goods or services, creating an obligation to the customer. Because there’s a duty to perform in the future, this amount is classified as a liability on the balance sheet. It isn’t an asset, since it doesn’t provide future benefits to the company; it represents something the company owes. It isn’t revenue or an expense, because those are recognized on the income statement only when the performance occurs or the goods are delivered. As the company fulfills the obligation, the liability is reduced and revenue is recognized. Often it’s a current liability if the delivery is expected within a year, or a long-term liability if the obligation spans longer.