How does accounts receivable differ from deferred revenue?

Accounts receivable (A/R) refers to amounts owed to a business by its customers for goods or services that have already been delivered but for which payment has not yet been received. In other words, A/R represents future cash inflow because it is the expectation that customers will pay the business for credit sales made to them.

When a company sells goods or services on credit, it records this transaction as an increase in accounts receivable. This reflects the rights of the company to receive cash from its customers in the future. Therefore, the correct answer identifies that A/R is cash yet to be collected, highlighting the nature of the account as a receivable.

On the other hand, deferred revenue (D/R) represents payments received by a company for goods or services that have not yet been delivered or rendered. It’s considered a liability until the company fulfills its obligation by providing those goods or services, at which point the revenue can be recognized.

Understanding the distinction between these two concepts is vital for interpreting financial statements and the timing of revenue recognition, reflecting the business’s financial position correctly.