Final answer:
When a company receives advance payments for services, it must record the payment as deferred or unearned revenue, a liability, until the service is performed.
Revenue is recognized gradually as the service is completed. Payments by check transfer funds from the payer to the payee's account, with overdrafts occurring for insufficient funds.
Step-by-step explanation:
Accounting Implications for Advance Payments
When a company receives money in advance of performing a service, the accounting implications involve recognizing the payment as a liability rather than revenue. This is because the service has not yet been performed and hence does not yet meet revenue recognition criteria.
The amount received is recorded on the balance sheet under a liability account, typically referred to as deferred revenue or unearned revenue. As the company performs the service, it can recognize the revenue over time according to the progress of service completion.
Furthermore, when using a check for payment, the payee deposits the check into their bank account, and the funds are transferred from the payer's account to the payee's account, assuming there are sufficient funds. If the payer has insufficient funds, an overdraft may occur, leading to additional fees and penalties for the payer.