Cengage Accounting Exam 1 Practice Test

Fees earned but not yet received are an example of accrued revenue. Under accrual accounting, revenue is recorded when it is earned, not when cash is received. If you perform a service and haven’t billed or collected cash yet, you recognize the revenue now and record an asset representing amounts owed—Accounts Receivable. Later, when the cash is collected, you reduce Accounts Receivable and increase Cash.

This differs from other classifications: a prepaid expense arises when you pay cash before receiving the benefit (an asset); unearned revenue occurs when you receive cash before earning the revenue (a liability); an accrued expense is an expense incurred but not yet paid (a liability).