On 1 May 2018, Dress in Style received a $2000 advance payment from a customer for the design and making of a formal gown. The gown is expected to be completed by the end of August 2018. The correct accounting entry to initially record the $2000 is:
A) DR Bank $2000; CR Unearned income $2000
B) DR Unearned income $2000; CR Bank $2000
C) DR Bank $2000; CR Accounts payable $2000
D) DR Income earned $2000; CR Bank $2000

Question

Quizplus · Accepted Answer

The correct accounting treatment for an advance payment from a customer is to record it as unearned income (a liability) until the goods or services are delivered. This is because the company has not yet earned the revenue and has an obligation to provide the product or service. Therefore, the correct accounting entry would be to debit Bank (asset account) for $2000 and credit Unearned income (liability account) for $2000.

On 1 May 2018, Dress in Style Received a $2000