What is an example of a time that a company would collect cash, but not recognize it as revenue?

Let me break it down simply:

Think of revenue like earning grades in school. Just because you paid for tutoring doesn't mean you've passed the class. Similarly, cash received doesn't always mean revenue is earned.

Deferred revenue is the classic example. Imagine a software company that gets paid upfront for a year-long subscription. They collect all the cash on day one, but recognize revenue ratably over the year. It's like paying for a year's gym membership but only counting each month you actually work out.

Deposits and prepayments work similarly. A construction company might receive a big deposit before starting work. That cash sits as a liability until the work is actually completed. Like a catering company collecting money before the wedding day.

Gift cards are another great example. When you buy a $100 gift card, the retailer gets cash but can't recognize revenue until the card is redeemed. It sits as a liability on the balance sheet until someone actually buys something.

Remember: Revenue is about earning, not just collecting. Just because cash hits the bank doesn't mean you've done the work to deserve recognizing that revenue. Matching principle is key in accounting.

Talk soon,

Sam