What is unearned revenue?

The correct choice indicates that unearned revenue refers to cash received before services are provided. This concept is integral to the accrual basis of accounting, which dictates that revenue should be recognized when it is earned rather than when cash is received. In the case of unearned revenue, a business receives payment in advance for services or goods that it has yet to deliver.

This situation creates a liability for the company because it has an obligation to provide the services in the future. Once the company fulfills that obligation, the revenue is then recognized on the income statement.

Understanding unearned revenue is important for accurate financial reporting, as it impacts both the balance sheet and the income statement. While it is indicative of cash inflow, it does not contribute to revenue until the associated services are performed or the goods are delivered. Hence, this choice accurately captures the nature of unearned revenue in financial accounting.