What is the correct difference between accounts receivable and deferred revenue?

What is the correct difference between accounts receivable and deferred revenue?

• A. Accounts receivable has not yet been collected in cash; Deferred revenue has been collected and is waiting to be recognized as revenue
• B. Accounts receivable is cash on hand; Deferred revenue is a liability to suppliers
• C. Accounts receivable represents revenue that has already been earned and collected; Deferred revenue represents revenue not yet earned
• D. Accounts receivable is a liability; Deferred revenue is an asset

Answer: (A)

Accounts receivable and deferred revenue reflect opposite timing of cash and revenue in accrual accounting. Accounts receivable is an asset: money you’ve billed to customers for goods or services already delivered but not yet received in cash. It will become cash when the customer pays. Deferred revenue is a liability: you’ve collected cash in advance, but you haven’t yet earned the revenue, so you still owe a product or service to the customer. Revenue is recognized later when the performance obligation is satisfied. For example, shipping a product and sending an invoice creates accounts receivable because payment is still pending. On the other hand, accepting payment for a yearly subscription upfront creates deferred revenue, since the cash is in but the revenue will be recognized gradually as each month passes and the service is delivered.

Accounts receivable and deferred revenue reflect opposite timing of cash and revenue in accrual accounting. Accounts receivable is an asset: money you’ve billed to customers for goods or services already delivered but not yet received in cash. It will become cash when the customer pays. Deferred revenue is a liability: you’ve collected cash in advance, but you haven’t yet earned the revenue, so you still owe a product or service to the customer. Revenue is recognized later when the performance obligation is satisfied.

For example, shipping a product and sending an invoice creates accounts receivable because payment is still pending. On the other hand, accepting payment for a yearly subscription upfront creates deferred revenue, since the cash is in but the revenue will be recognized gradually as each month passes and the service is delivered.