What are the effects on the accounting equation from the adjustment for revenue earned during the accounting period that had previously been recorded as a liability?

Question

BlackTom AI · Accepted Answer

Unearned (deferred) revenue is a liability that becomes earned revenue when the company satisfies the performance obligation. The adjusting journal entry debits (decreases) the liability and credits (increases) revenue, which flows through to retained earnings (part of stockholders' equity) when income is closed.

1) Relevant concepts
- Accounting equation: Assets = Liabilities + Stockholders' Equity.
- Unearned revenue is a liability until earned.
- Recognizing revenue increases net income and, ultimately, retained earnings (equity).
- Adjusting entry: Debit Unearned Revenue; Credit Revenue.

2) Step-by-step reasoning
- Initially: cash receipt created an asset (Cash) and a liability (Unearned Revenue).
- When revenue is earned during the period, the liability is reduced and revenue is recorded.
- Journal entry: Debit Unearned Revenue; Credit Revenue.

3) Intermediate steps / numeric example
- Suppose $1,000 was received earlier and recorded as: Debit Cash +1000; Credit Unearned Revenue +1000.
- Adjustment when earned: Debit Unearned Revenue 1,000 (liabilities −1,000); Credit Service Revenue 1,000 (revenue +1,000).
- Closing effect: Revenue increases net income by 1,000, which increases Retained Earnings by 1,000 (equity +1,000).
- Net effect on equation: Assets (no change at adjustment) = Liabilities (−1,000) + Equity (+1,000). Equation remains balanced.

4) Why the correct answer is correct
Because the liability account is reduced (debit Unearned Revenue) and equity increases through recognized revenue → retained earnings. Thus total liabilities decrease and total stockholders’ equity increases.

5) Why other choices are incorrect
- “Liabilities increase and equity increase”: incorrect because liability is reduced, not increased.
- “Liabilities decrease and equity decrease”: incorrect because recognizing revenue increases equity, not decreases it.
- “Liabilities increase and equity decrease”: opposite of actual effect.

6) Conclusion
Total liabilities will decrease and total stockholders' equity will increase, which matches the provided answer.

What are the effects on the accounting equation from the adjustment for revenue earned during the accounting period that had previously been recorded as a liability?单项选择题

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