Ace the SACE Stage 2 Accounting Test 2025 – Count on Success and Turbocharge Your Future!

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How is unearned (prepaid) revenue classified in accounting?

Current Asset

Current Liability

Unearned revenue, also known as prepaid revenue, represents money received by a business for services or goods that have not yet been delivered or performed. Since the revenue is not earned until the service is provided or the product is delivered, it is classified as a liability. This is because the company has an obligation to either deliver the service or refund the money.

In accounting, current liabilities are obligations that are expected to be settled within one year. Unearned revenue is typically expected to be recognized as revenue within the operating cycle of the business, as services or goods are usually provided in the short term. Therefore, it is appropriate to classify unearned revenue as a current liability.

This classification ensures that the financial statements accurately represent the company's financial position and obligations, allowing stakeholders to understand the liability that the company has incurred in exchange for the cash received.

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Long-term Asset

Equity

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