Online Computer Services follows accrual-based accounting. It receives $7,000 in advance for services to be performed in both the current and following fiscal period. Which of the following entries records this transaction?
A) A debit to Cash and a credit to Service Revenue
B) A debit to Cash and a credit to Accounts Payable
C) A debit to Cash and a credit to Unearned Service Revenue
D) A debit to Unearned Service Revenue and a credit to Service Revenue
E) A debit to Service Revenue and a credit to Unearned Service Revenue

Question

Quizplus · Accepted Answer

Since the $7,000 is received in advance for services to be performed in the future, it should be recorded as a liability. The account that represents this liability is called Unearned Service Revenue. Therefore, the correct journal entry is a debit to Cash (asset account) and a credit to Unearned Service Revenue (liability account). Option C is the only choice that records this transaction correctly. Option A records the transaction as if the services have already been performed, which is incorrect. Option B records a liability to pay someone else, which is not applicable in this situation. Option D and E reverse the debit and credit accounts, which is also incorrect.

Online Computer Services Follows Accrual-Based Accounting