BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The business owes money to the customer because the customer rendered its service.
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The customer owes money to the business.
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The business owes service to the customer because the customer gave an advanced payment.
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Detailed explanation-1: -It is because the unearned revenue of any company is recorded differently than the earned revenue. The advance received becomes the liability to the company till the goods have been delivered or the services have been rendered to the party and will be shown on the liability side of the balance sheet.
Detailed explanation-2: -Unearned revenue is the money received by a business from a customer in advance of a good or service being delivered. It is the prepayment a business accrues and is recorded as a liability on the balance sheet until the customer is provided a service or receives a product.
Detailed explanation-3: -Deferred or unearned revenue is also known as prepaid revenue. These terms refer to advances received from customers. However, since the business is yet to provide actual goods or services, it considers unearned revenue as liabilities, as explained further below.
Detailed explanation-4: -Unearned revenue explained When a customer pays for products or services in advance of their receipt, this payment is recorded by a business as unearned revenue.
Detailed explanation-5: -Since current liabilities are part of the working capital, a current balance of unearned revenue reduces a company’s working capital. If a company overestimates its working capital by not making any adjustments for unearned revenue, it may create cash flow problems in the future.