Creol Soaps requires its customers to pay for their orders six weeks before shipping the goods.How should the payments be initially recorded by Creol?

Question

Quizplus · Accepted Answer

Customers paying for their orders in advance creates a liability for the company, as they have yet to fulfill their end of the transaction. Therefore, the payment should be recorded as a debit to the bank account and a credit to a liability account, such as "prepayments" or "customer deposits". Option A is correct as it reflects this accounting treatment. Option B is incorrect as it suggests that the payment is an expense, which is not accurate. Option C is also incorrect as it implies the payment is an asset, when it is actually a liability. Option D is incorrect as it implies that the payment is an income, which is only recognized when the goods are shipped or delivered.

Creol Soaps Requires Its Customers to Pay for Their Orders