Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

2. Transaction Analysis

Journal Entries: Debits and Credits

Financial Accounting

2. Transaction Analysis

Journal Entries: Debits and Credits

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Multiple Choice

On October 1, a client pays a company the full $12,000 in advance for services to be provided over the next 12 months. Which of the following is the correct journal entry to record this transaction?

Debit Unearned Revenue $12,000; Credit Service Revenue $12,000

Debit Accounts Receivable $12,000; Credit Service Revenue $12,000

Debit Service Revenue $12,000; Credit Cash $12,000

Debit Cash $12,000; Credit Unearned Revenue $12,000

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Verified step by step guidance

Understand the nature of the transaction: The client is paying $12,000 in advance for services that will be provided over the next 12 months. This means the company has received cash but has not yet earned the revenue, as the services are to be provided in the future.

Identify the accounts involved: Since the company is receiving cash, the 'Cash' account will be affected. Additionally, because the revenue has not yet been earned, the company must record a liability called 'Unearned Revenue' to reflect the obligation to provide services in the future.

Determine the type of accounts: 'Cash' is an asset account, and it increases when the company receives money. 'Unearned Revenue' is a liability account, and it increases when the company receives payment for services not yet performed.

Apply the rules of debits and credits: To increase an asset account like 'Cash,' you debit it. To increase a liability account like 'Unearned Revenue,' you credit it.

Record the journal entry: Debit the 'Cash' account for $12,000 to reflect the increase in cash. Credit the 'Unearned Revenue' account for $12,000 to reflect the increase in the company's liability to provide services in the future.