Accounting Theory Question

Case 8- 10 Accounting for Prepaids and Deferrals

Short term deferrals (prepaid and unearned revenues) are classified as current assets and current liabilities. As such included in working capital.

Required

1. Why do accountants include short-term unearned revenues as current liabilities? Do they meet the definition of liabilities found in the conceptual framework? Do they affect working capital? Explain.

2. Present arguments for excluding unearned revenues from current liabilities. Do they affect liquidity? Explain.