What account is used to hold funds until revenue is recognized in a service setup?

In a service setup, funds that are received but not yet earned are typically held in a liability account, which is often referred to as "Deferred Revenue" or "Unearned Revenue." This type of account captures the obligation that the business has to provide services or fulfill contracts in the future, reflecting that while cash has been received, the service has not yet been delivered. This aligns with the revenue recognition principle, which states that revenue should only be recognized when it is earned, not when cash is received.

By using a liability account, businesses ensure they accurately represent their financial position, indicating that there is an obligation to provide services in the future, thus adhering to proper accounting principles. When the services are eventually performed, the amount in the liability account is then recognized as revenue in the income statement.

The other options, such as asset, revenue, and equity, do not accurately describe the nature of funds that have been collected but not yet earned in a service context. Assets represent resources owned by the company, revenue reflects income earned from operations, and equity represents the owners' interest in the business. Therefore, a liability account is the most appropriate classification for these funds.