Assume that a magazine publishing company collects $120 from a customer for a 12-month subscription, but has not yet sent out any magazines when the accounting period ends. Under accrual accounting, at the time this money is collected, the books should reflect
A) A liability of $120 and a revenue of $120
B) Cash of $120 and an expense of $120
C) Nothing, since no magazines have yet been mailed
D) A liability of $120 and cash of $120

Question

Quizplus · Accepted Answer

The correct answer is D because under accrual accounting, when the company receives money for services not yet performed (in this case, magazines not yet sent), it records the amount as a liability (unearned revenue) and an increase in cash. The liability reflects the company's obligation to deliver the magazines in the future, and the cash reflects the increase in the company's assets due to the payment received.

Assume That a Magazine Publishing Company Collects $120 from a Customer