If a business receives cash in advance of performing services and credits a liability account, the adjusting entry needed after the services are performed will be

Question

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When a business receives cash in advance for services that have not yet been performed, it is recorded as a liability called Unearned Service Revenue. After the services have been performed, the liability account must be reduced and the revenue recognized. Therefore, the adjusting entry would be to debit Unearned Service Revenue and credit Service Revenue. This records the reduction of the liability and the recognition of the revenue earned. Option A is incorrect because the cash was already received and credited, so there is no need to credit cash again. Option C is incorrect because Prepaid Expense is a different type of account used for expenses that have been paid in advance, not revenue. Option D is incorrect because Accounts Receivable is used for customers who owe the business money, not for recording revenue received in advance.

If a Business Receives Cash in Advance of Performing Services