Multiple Choice
Which of the following pre-payments requires an adjusting entry at the end of the year to recognize revenue earned?
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3. Accrual Accounting Concepts
Adjusting Entries: Unearned Revenue
Multiple Choice
Receiving cash from customers before services are performed affects which of the following accounts?
A
Service Revenue (Revenue)
B
Prepaid Expenses (Asset)
C
Accounts Receivable (Asset)
D
Unearned Revenue (Liability)
Verified step by step guidance1
Understand the concept of unearned revenue: Unearned revenue is a liability account that represents cash received from customers for services or goods that have not yet been provided. It reflects the company's obligation to deliver the service or product in the future.
Analyze the transaction: When cash is received before services are performed, the company has not yet earned the revenue. Therefore, the cash received cannot be recorded as revenue immediately.
Determine the correct account: Since the company has an obligation to perform services in the future, the cash received is recorded as a liability under the Unearned Revenue account.
Eliminate incorrect options: Service Revenue is incorrect because revenue is only recognized when services are performed. Prepaid Expenses is incorrect because it represents payments made by the company for future expenses, not cash received. Accounts Receivable is incorrect because it represents amounts owed to the company, not cash received.
Conclude the correct account: The correct account affected by receiving cash before services are performed is Unearned Revenue, which is classified as a liability.
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