Happy Harry requires his customers to pay for their orders six weeks before shipping the goods. How should the cash receipts be recorded by Harry?

Question

Quizplus · Accepted Answer

Since the customers are paying for their orders in advance, it creates a liability for Harry until he delivers the goods. Therefore, the cash receipts should be recorded as a debit to the bank account and a credit to a liability account (such as "Customer Deposits" or "Deferred Revenue"). This will accurately reflect the amount of cash received and the obligation Harry has to fulfill the orders. Option A is incorrect because an asset account would not accurately reflect the liability Harry owes to his customers. Option B is incorrect because paying for orders is not an expense. Option D is incorrect because the cash receipts are not revenue yet - they only become revenue once the goods are shipped.

Happy Harry Requires His Customers to Pay for Their Orders