What situation requires adjusting journal entries when cash is received before the performance obligation is met?

• A. Deferred expenses
• B. Deferred revenues
• C. Accrued expenses
• D. Unearned revenues

Answer: (B)

When cash is received before the performance obligation is met, the proper accounting treatment requires recognizing a liability, which represents the obligation to provide goods or services in the future. Deferred revenues specifically refer to this scenario. They are liabilities arising from receiving payment in advance for goods or services that have not yet been delivered or performed.

For example, if a company receives payment for a subscription service that it has yet to fully provide, this payment creates a liability because the company has a future obligation to deliver the service. Therefore, adjusting journal entries are needed to reflect this deferred revenue on the company's balance sheet until the performance obligation is fulfilled, at which point the revenue can be recognized.

In contrast, deferred expenses involve payments made in advance for expenses that will be recognized in future periods, which may not necessitate the same kind of liability recognition. Accrued expenses refer to obligations for expenses that have been incurred but not yet paid, while unearned revenues generally serve as another term for the same concept as deferred revenues, but it's less commonly used in this specific context, making deferred revenues the clearer choice for this situation.