The adjusting entry required when amounts previously recorded as deferred revenues are recognized includes:
A) A debit to a liability.
B) A debit to an asset.
C) A credit to a liability.
D) A credit to an asset.

Question

Quizplus · Accepted Answer

CDeferred revenues are initially recorded as liabilities because they represent obligations to deliver products or services in the future. When these revenues are recognized (i.e., when the products or services are delivered), the company needs to reduce the liability. This is done by debiting the liability account (A), which decreases it. At the same time, the company needs to recognize the revenue, which is done by crediting a revenue account (not listed in the options but implied by the process of recognizing deferred revenues). Option C is incorrect in this context because it suggests increasing a liability, which is not the action taken when recognizing deferred revenues.

The Adjusting Entry Required When Amounts Previously Recorded as Deferred