Question

When a company collects cash from customers before performing the contracted service, what is the impact, and how should it be recorded?

a) Impact: Decrease in liabilities; Record: Debit Cash, Credit Unearned Revenue.
b) Impact: Increase in assets; Record: Debit Unearned Revenue, Credit Cash.
c) Impact: Increase in equity; Record: Debit Cash, Credit Revenue.
d) Impact: Decrease in assets; Record: Debit Accounts Receivable, Credit Cash.

Answer 1

The company's collection of cash before services are performed results in an increase in assets and the liability 'unearned revenue'. It is recorded by debiting cash and crediting unearned revenue.

Step-by-step explanation:

When a company collects cash from customers before performing the contracted service, the correct impact and recording is: Impact: Increase in assets; Record: Debit Cash, Credit Unearned Revenue. This means that the company has received money, which increases its cash assets, but it owes a service to the customer, thus creating a liability called unearned revenue.

As the company performs the service, it will move the amount from unearned revenue to revenue, reflecting the earning of that income.