What are deferred revenues in the context of GAAP?

• A. Cash received before services are performed, recognized as liability
• B. Revenue recognized prior to cash collection
• C. Future income expected from investments
• D. Cash received after services have been performed

Answer: (A)

Deferred revenues are recognized as a liability because they represent cash received from customers for goods or services that have not yet been delivered or performed. In the context of GAAP, this concept is crucial for aligning revenue recognition with the service delivery timeline, which follows the revenue recognition principle. This principle states that revenue should only be recognized when it is earned, not merely when cash is received. Therefore, until the services are rendered or the goods are delivered, the cash received is treated as a liability on the balance sheet, reflecting the obligation to perform under the terms of the agreement. This ensures a proper matching of revenues with the expenses incurred in association with earning those revenues, providing a more accurate financial picture of the enterprise’s obligations and earnings.