Multiple Choice
Which of the following is the correct adjusting entry to recognize revenue earned from previously recorded unearned revenue?
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3. Accrual Accounting Concepts
Adjusting Entries: Unearned Revenue
Multiple Choice
When The Home Depot provides services that were previously paid for with a gift card (recorded as unearned revenue), which adjusting journal entry should be made?
A
Debit Unearned Revenue; Credit Service Revenue
B
Debit Service Revenue; Credit Unearned Revenue
C
Debit Unearned Revenue; Credit Cash
D
Debit Cash; Credit Service Revenue
Verified step by step guidance1
Understand the concept of unearned revenue: Unearned revenue represents money received by a company for services or goods that have not yet been provided. It is recorded as a liability because the company owes the service or product to the customer.
Identify the transaction: In this case, The Home Depot is providing services that were previously paid for with a gift card. This means the company is fulfilling its obligation, and the unearned revenue should be reduced.
Determine the accounts involved: The unearned revenue account (a liability) will decrease because the obligation has been fulfilled, and the service revenue account (an income account) will increase to reflect the revenue earned from providing the service.
Formulate the journal entry: To decrease unearned revenue, you debit the Unearned Revenue account. To increase service revenue, you credit the Service Revenue account.
Write the adjusting journal entry: Debit Unearned Revenue and Credit Service Revenue to reflect the fulfillment of the obligation and recognition of earned revenue.
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