Question

Which of the following shows how the adjusting entry to recognize services provided to a client who paid for the services prior to the work being performed

A. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
+ NA + + NA + NA

B. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
NA − + + NA + +OA

C. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
NA − + + NA + NA

D. Balance Sheet Income Statement Statement of Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
− − NA + NA + NA

Answer 1

The correct adjusting entry for recognizing services provided when payment has already been received is to decrease liabilities and increase revenues, which corresponds to Option B: decreasing unearned revenue and increasing service revenue, resulting in an increase in net income.

Step-by-step explanation:

In order to recognize services provided to a client who paid for the services prior to the work being performed, the correct adjusting entry would involve decreasing a liability account and increasing a revenue account. This reflects the fact that the company has earned the revenue by providing the service, thus reducing the obligation to deliver services in the future.

The correct answer to this question is Option B. When services are provided, the company’s unearned revenue liability decreases and the revenue on the income statement increases, which in turn increases net income (assuming no other changes to expenses). This has no immediate effect on cash flows because the cash was received prior to the recognition of this revenue.