12. How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.
13. What are compensated absences?
Answer (2)
Unearned revenue occurs when money is received for goods or services not yet provided, classifying it as a current liability due to the obligation to deliver in the future. Examples include subscription services, advance ticket sales, and school tuition payments. Compensated absences are employee benefits allowing paid leave, which businesses account for as a liability.
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Unearned revenue arises when a company receives payment for goods or services before they have been provided. This situation occurs because the payment is received in advance of the actual earning process. It is classified as a current liability because it represents an obligation to deliver goods, services, or refunds in the near future—typically within one year.
Here are several examples of business activities that result in unearned revenues:
Subscription Services: Companies that offer magazine, software, or media subscriptions often receive payment upfront before providing the full service throughout the subscription period.
Prepaid Rent: A landlord may receive rent payments for future months in advance, which they will then recognize as revenue over the months as the tenant occupies the premises.
Airline Tickets: Airlines often collect payments when a ticket is booked, which is then recognized as revenue once the flight occurs.
Tickets for Events: For concerts, sports events, or theater performances, the payments received for the tickets before the event occur as unearned revenue.
Now, regarding compensated absences:
Compensated absences are benefits that employees accrue through their service, which they can use for days when they are not working due to illness, vacation, or personal reasons. This can include paid time off (PTO), sick leave, or vacation time. These absences are compensated because the employee still receives a salary or wages for the time they are not at work.
