Chapter 16-Unearned/Accrued Revenues

Question 1

Definition of unearned revenues

Answer 1

A current liability that arises when cash is received in advance for revenue that is yet to be earned

Question 2

Explain why unearned revenue is classified as a current liability

Answer 2

Unearned revenue is reported as a current liability as it represents a present obligation that is expected to result in an outflow of economic benefits when the good/service is supplied sometime in the next 12 months.

Question 3

Identify two situations that may lead to the receipt of a deposit

Answer 3

• A customer pays a deposit on an item of stock in order to secure the sale
• A new product is released, and customers pay in advance to ensure they are among the first to own the item.

Question 4

Definition of Accrued revenue

Answer 4

a current asset which arises when revenues has been earned but cash is yet to be received

Question 5

Explain why an accrued revenue is classified as a current asset.

Answer 5

Accrued Revenue is reported as a current asset - a resource controlled by the entity from which future economic benefit is expected to be received (when the cash is received) in the next 12 months.

Question 6

Distinguish between accrued revenue and Accounts Receivable

Answer 6

If the customer has the goods and the invoice, then a credit sale has occurred, and an AR should be recognised. However, if the revenue relates to a transaction other than sales, and the customer has not been sent the invoice, then accrued revenue has been earned.