Which term is defined as Prepayments?

Which term is defined as Prepayments?

• A. Unearned Revenue
• B. Voucher
• C. Liabilities
• D. GAAP

Answer: (A)

Prepayments occur when cash is received before the revenue is earned. In accounting, that money creates an obligation to the customer and is recorded as unearned revenue, a liability, until the goods or services are delivered. So unearned revenue is the term that defines prepayments in this context. A voucher is just a payment authorization, liabilities is too broad, and GAAP is the accounting framework, not a term for prepayments. (If the scenario involved paying in advance for one's own expenses, that would be prepaid expenses, an asset—not listed here.)

Prepayments occur when cash is received before the revenue is earned. In accounting, that money creates an obligation to the customer and is recorded as unearned revenue, a liability, until the goods or services are delivered. So unearned revenue is the term that defines prepayments in this context. A voucher is just a payment authorization, liabilities is too broad, and GAAP is the accounting framework, not a term for prepayments. (If the scenario involved paying in advance for one's own expenses, that would be prepaid expenses, an asset—not listed here.)