What is meant by prepaid revenue?

Prepaid revenue refers specifically to money that has been received by a business for goods or services that have yet to be provided or earned. This means that while cash has come into the company, the corresponding revenue recognition will occur in the future once the service is rendered or the goods are delivered.

This concept is essential in accounting because it aligns with the revenue recognition principle, which states that revenue should only be recognized when it is earned, not necessarily when cash is received. As a result, prepaid revenue is recorded as a liability on the balance sheet because the business has an obligation to deliver a product or service in the future.

In contrast, other options reflect different situations of revenue recognition. For instance, revenue that has been earned but not yet received is recognized in the accounts receivable. Revenue that is both earned and received would not be classified as prepaid since it is fully recognized. Projected revenue for future periods pertains to forecasts and does not involve actual transactions or transfers of cash.