Question

Grossing Inc. receives $10,000 in advance this month for work to be performed next month. This month, the

company should record a journal entry that includes a debit to:
a. Cash and a credit to Service Revenue for $10,000.
b. Cash and a credit to Deferred Revenue for $10,000.
c. Cash and a credit to Accounts Receivable for $10,000.
d. Prepaid Services and a credit to Cash for $10,000.

Answer 1

Grossing Inc. should record a journal entry with a debit to Cash and a credit to Deferred Revenue for $10,000.

Step-by-step explanation:

The correct option for Grossing Inc. recording a journal entry for receiving $10,000 in advance is b. Cash and a credit to Deferred Revenue for $10,000.

When a company receives cash in advance for work that will be performed in the future, it creates a liability called Deferred Revenue. This is because the company has not yet earned the revenue and therefore cannot recognize it as revenue immediately.

By debiting Cash and crediting Deferred Revenue, the company is reflecting that it has received the cash but has not yet provided the services associated with the advance payment.