A company receives money in advance of performing a service.What is the journal entry for the transaction?

Question

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When a company receives money in advance of performing a service, it creates a liability called Unearned Revenue. Therefore, the journal entry would be to debit Cash (an asset account) because the company received cash and credit Unearned Revenue (a liability account) because the company has not yet earned the revenue. Choice A is incorrect because Accounts Payable represents a liability owed to a supplier/vendor and is not relevant to this transaction. Choice C is incorrect because Prepaid Fees would represent a company paying for a service in advance, rather than receiving payment in advance. Choice D is incorrect because Accounts Receivable represents a company's expectation to receive payment from a customer, rather than the company receiving payment in advance.

A Company Receives Money in Advance of Performing a Service