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

• A. Both represent liabilities
• B. Accounts receivable is cash not yet received; deferred revenue is revenue already earned
• C. Accounts receivable is earned revenue; deferred revenue is cash collected but not yet earned
• D. Deferred revenue is an asset; accounts receivable is a liability

Answer: (C)

The key difference between accounts receivable and deferred revenue lies in the timing of when revenue is recognized and how it impacts the financial statements. Accounts receivable represents amounts that a company has earned by providing goods or services, but has not yet collected payment for. This means that the revenue is recognized in the accounting period during which the goods or services were delivered, even though cash has not yet been received.

On the other hand, deferred revenue refers to cash that a company has received in advance for goods or services that have not yet been delivered or performed. This means that although the company has received payment, it cannot recognize that amount as revenue until the goods or services are actually provided. As a result, deferred revenue is recorded as a liability on the balance sheet because the company has an obligation to fulfill these future deliveries or services.

In summary, accounts receivable reflects earned revenue yet to be collected, while deferred revenue is cash collected for activities not yet completed, making option C the accurate representation of the distinction between the two concepts.