Question

On November 1, 2024, a company signs a one-year contract to provide services. The agreement specifies payments of $4,500 to be received at the end of every three months for a total of $18,000 over the entire year ($1,500 per month). No entry is made on November 1, 2024, at the time the contract is signed. The first payment will be received on January 31, 2025. What adjustment does the company need to record at the end of the year on December 31, 2024?

Answer 1

To record the adjustment at the end of the year on December 31, 2024, the company needs to recognize the revenue it earned from providing services for two months (November and December) but has not received payment for yet. This is done using the accrual accounting method.

Step-by-step explanation:

To record the adjustment at the end of the year on December 31, 2024, the company needs to recognize the revenue it earned from providing services for two months (November and December) but has not received payment for yet. This is done using the accrual accounting method.

The company should create an adjusting entry by debiting Accounts Receivable and crediting Service Revenue for the amount of the revenue earned but not yet received ($3,000 which is $1,500 per month for two months). This will increase both the assets (accounts receivable) and the revenue account.