In August, Falcon Inc.received cash in advance of rendering services to its clients.If only a few of those services were provided by December 31, the year-end adjustment would:
A) increase unearned revenue and decrease revenue.
B) increase accounts payable and decrease revenue.
C) increase cash and decrease accounts receivable.
D) decrease unearned revenue and increase revenue.

Question

Quizplus · Accepted Answer

When Falcon Inc. receives cash in advance for services, it records this as unearned revenue, a liability, because the service has not yet been provided. As services are rendered, unearned revenue is decreased (because the obligation to provide services is being fulfilled), and revenue is increased (because the service is being provided and thus earning the revenue).