A company whose fiscal year ends on 31 December 2022 receives an advance payment on 15 December 2022 for goods to be sold in 2023. Which of these items will be affected in the 2022 fiscal year?

Question

BlackTom AI · Accepted Answer

Under accrual accounting, revenue is recognized when earned, not when cash is received. Receiving an advance creates cash and a liability (deferred/unearned revenue) until the goods are delivered.

1) Relevant knowledge points and concepts
- Revenue recognition principle: recognize revenue when performance obligations are satisfied (goods delivered), not on cash receipt.  
- Receipt of advance payment creates an asset (cash) and a liability (unearned revenue / accrued liability) until earned.  
- Fiscal year-end (31 Dec 2022) determines what appears on 2022 financial statements: any amounts not earned by that date remain liabilities, not revenue.

2) Step-by-step reasoning process
- On 15 Dec 2022 the company receives cash for goods that will be sold in 2023.  
- The company has not yet delivered the goods by 31 Dec 2022, so the performance obligation is unmet.  
- Therefore the correct accounting treatment in 2022 is to record the cash received and record a corresponding liability (unearned revenue) representing the obligation to deliver goods in 2023. Revenue is deferred.

3) Journal entry (intermediate steps shown)
- Debit Cash (asset) — increases cash balance.  
- Credit Unearned Revenue / Accrual (liability) — increases liability because company owes goods/service in future.  
No revenue recognition entry is made until the goods are delivered in 2023.

4) Why the correct answer is correct
- Option c states Accrual (Increase), Cash (Increase), which matches the journal entry: cash increases and an accrual/unearned revenue liability increases in 2022. This correctly defers revenue until the obligation is satisfied.

5) Why the other options are incorrect
- a (Revenue decrease, Cash increase): receiving cash cannot decrease revenue; revenue wouldn’t be decreased and in any case revenue isn’t recognized yet.  
- b (Revenue increase, Accrual increase): you would not both recognize revenue and record an unearned liability for the same amount — that would double-count.  
- d (Revenue increase, Cash increase): recognizes revenue prematurely in 2022 even though goods are sold in 2023, violating revenue recognition.

6) Conclusion
The correct treatment for 2022 is an increase in Cash and an increase in Accrual (unearned revenue). This matches option c.

A company whose fiscal year ends on 31 December 2022 receives an advance payment on 15 December 2022 for goods to be sold in 2023. Which of these items will be affected in the 2022 fiscal year?Single choice

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