Question

a company operates a consulting practice. new clients are required to pay the firm in two transactions. first, clients must pay $200 before receiving consulting services. second, clients must pay $1,800 once the consulting firm finishes providing services to the client. how does the company account for the second transaction?

Answer 1

The company accounts for the $1,800 payment by recognizing it as revenue when the service is completed, debiting accounts receivable and crediting service revenue using the accrual accounting principle.

Step-by-step explanation:

The company would account for the second transaction by recognizing it as revenue once the services have been completed. This follows the accrual basis of accounting where revenue is recognized when it is earned, not necessarily when cash is received. Assuming that the company uses double-entry bookkeeping, the accounting entries for this transaction would be a debit to accounts receivable and a credit to service revenue for $1,800.

When payment is eventually received, the entry will be a debit to cash and a credit to accounts receivable, reflecting that the client's obligation to pay has been settled and cash has been collected. If the payment is received at the same time as the service completion, both entries can be combined, with a debit to cash and a credit to service revenue.