Final answer:
When revenue is collected and recorded in advance, it's accounted for as deferred revenue, which represents a future obligation to deliver goods or services. This reflects on the balance sheet as a liability and becomes earned revenue gradually as the company fulfills its obligations.
Step-by-step explanation:
When a revenue is collected and recorded in advance, it is normally accounted for as deferred revenue. Deferred revenue is money received for goods or services which have not yet been delivered or performed. This is considered a liability on a company's balance sheet because it represents a future obligation to provide goods or services. As the company delivers goods or provides services, the deferred revenue is recognized as earned revenue on the income statement over time, usually in alignment with the company's revenue recognition policy.
For example, if a software company receives payment for a one-year subscription, but the software service will be provided over the course of the year, the initial payment is recorded as deferred revenue, not as earned revenue. As the service is provided each month, a portion of that payment is recognized systematically as revenue.
Since the end of World War II, revenues for all three levels of government (federal, state, local) in the United States have grown significantly. In fact, when adjusted for inflation and population, revenues have increased by more than 800 percent. This statistic helps illustrate the substantial nature of government-related revenues over time, although the principle of deferred revenue generally applies to businesses rather than to government accounting.