When a company receives cash before products or services are provided the following results:

Question

BlackTom AI · Accepted Answer

Receiving cash in advance creates unearned revenue (a liability) and increases cash (an asset). Under accrual accounting, cash received before performance is recorded as a liability because the company owes goods or services to the customer.

Relevant concepts:
- Accrual basis: revenues are recognized when earned, not when cash is received.
- Unearned (deferred) revenue: a liability representing obligation to deliver goods/services.
- Journal entries: debits increase assets, credits increase liabilities/equity.

Step-by-step reasoning with an example:
1. Suppose the company receives $1,000 in advance for future services.
2. The correct journal entry when cash is received:
   - Debit Cash $1,000 (increase asset)
   - Credit Unearned Revenue $1,000 (increase liability)
3. Verify the accounting equation:
   - Before: Assets = Liabilities + Equity (assume 0,0,0 for simplicity)
   - After: Assets = $1,000; Liabilities = $1,000; Equity = $0 → $1,000 = $1,000 + $0 (balanced)

Why the correct answer is correct:
- Cash (an asset) increases immediately on receipt.
- Unearned revenue is recorded because the company has an obligation; this increases liabilities.
- No revenue is recognized until the service/product is delivered, so stockholders’ equity and revenue do not change at the time of receipt.

Why the other options are incorrect:
- "Assets and stockholders' equity increase.": Equity only increases when revenue is earned or capital invested; advance receipts by themselves do not increase equity.
- "Assets and revenue increase.": Revenue is not recognized until performance occurs under accrual accounting.
- "Liabilities and revenues increase.": Revenues do not increase until the company has earned them; only liabilities increase on receipt.

Conclusion: Assets and liabilities both increase when cash is received before providing products/services. This confirms the correct answer: "Liabilities and assets increase."

When a company receives cash before products or services are provided the following results:Single choice

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