What's the difference between Accounts Receivable and Deferred Revenue?

What's the difference between Accounts Receivable and Deferred Revenue?

• A. Accounts Receivable has not yet been collected in cash from customers, whereas Deferred Revenue has been. Accounts Receivable is for a product/service the company has already delivered but hasn't been paid for yet, whereas Deferred Revenue is for a product/service the company has not yet delivered.
• B. Accounts Receivable has been collected; Deferred Revenue not collected.
• C. Accounts Receivable and Deferred Revenue are the same.
• D. Accounts Receivable is a liability; Deferred Revenue is an asset.

Answer: (A)

The key idea is the timing of cash receipt versus when the revenue is earned. Accounts receivable is an asset that records money customers owe you after you’ve delivered a product or service; cash hasn’t come in yet, but you have a right to collect it, and the revenue has been earned. Deferred revenue, on the other hand, is a liability that records cash you’ve already received before you’ve delivered the product or performed the service; you owe the customer the goods or the service, so the revenue isn’t earned yet. On the balance sheet, AR increases when you extend credit and recognize revenue; cash is collected later. Deferred revenue increases when you collect cash in advance and decreases as you fulfill the obligation and recognize the revenue. Example helps: if you ship a product today on credit, you record accounts receivable and revenue now; when the customer pays, you convert AR to cash. If you collect payment upfront for a one-year service, you record deferred revenue today and gradually recognize revenue each period as you provide the service. That aligns with the statement that Accounts Receivable is for revenue earned but not yet collected, while Deferred Revenue is cash collected but not yet earned. The other options mix up which is an asset versus a liability or when the cash is collected relative to the earnings.

The key idea is the timing of cash receipt versus when the revenue is earned. Accounts receivable is an asset that records money customers owe you after you’ve delivered a product or service; cash hasn’t come in yet, but you have a right to collect it, and the revenue has been earned. Deferred revenue, on the other hand, is a liability that records cash you’ve already received before you’ve delivered the product or performed the service; you owe the customer the goods or the service, so the revenue isn’t earned yet. On the balance sheet, AR increases when you extend credit and recognize revenue; cash is collected later. Deferred revenue increases when you collect cash in advance and decreases as you fulfill the obligation and recognize the revenue.

Example helps: if you ship a product today on credit, you record accounts receivable and revenue now; when the customer pays, you convert AR to cash. If you collect payment upfront for a one-year service, you record deferred revenue today and gradually recognize revenue each period as you provide the service.

That aligns with the statement that Accounts Receivable is for revenue earned but not yet collected, while Deferred Revenue is cash collected but not yet earned. The other options mix up which is an asset versus a liability or when the cash is collected relative to the earnings.