Question

AAA Consulting Services collected $6,000 cash for services to be provided in the future. Which of the following shows how recognizing the cash receipt will affect the company's ledger accounts?

Answer 1

AAA Consulting Services records the cash for future services by debiting Cash and crediting Unearned Revenue in their ledger accounts, representing an increase in assets and liabilities respectively.

Step-by-step explanation:

When AAA Consulting Services collects cash for services to be provided in the future, this transaction will result in an increase in cash and an increase in a liability account. In accounting terms, the company's ledger accounts will reflect a debit to the Cash account and a credit to the Unearned Revenue (or Deferred Revenue) account.

The journal entry would look like this:

• Debit Cash $6,000 (increase in asset)
• Credit Unearned Revenue $6,000 (increase in liability)

This change in the company's ledger accounts represents the receipt of money for services that are yet to be performed. It is important because it has not yet been earned, hence, it cannot be recognized as revenue at the time of receipt. Instead, it will be recognized as revenue over time as the services are rendered according to the matching principle in accounting.