Suppose that a customer pays a deposit for work to be done next year. The business will increase an asset account (cash at bank) and will:

Question

BlackTom AI · Accepted Answer

Cash received before performing services is recorded as unearned revenue, a liability, because the business owes services to the customer rather than having earned revenue.

1. Relevant knowledge points and concepts
- Accrual-basis accounting: revenue is recognized when earned, not necessarily when cash is received (revenue recognition principle).
- The accounting equation: Assets = Liabilities + Owner’s Equity. Every transaction must keep this balance.
- Unearned revenue (also called deferred revenue) is a liability that represents an obligation to provide goods or services in the future.

2. Step-by-step reasoning
- A customer pays a deposit (cash) for work to be done next year. The business receives cash now, so an asset (Cash at Bank) increases.
- Because the work has not yet been performed, the business has an obligation to deliver services later. That obligation is recorded as a liability (unearned revenue), not as revenue today.
- Journal entry when cash is received: Debit Cash (asset increases); Credit Unearned Revenue (liability increases).

3. Calculations / intermediate steps (numeric example)
- Suppose deposit = $1,000.
  - Entry on receipt: Dr Cash $1,000; Cr Unearned Revenue $1,000.
  - Effect on accounting equation: Assets +$1,000 = Liabilities +$1,000 + Owner’s Equity (no change). Equation remains balanced.
- When work is completed next year and revenue is earned:
  - Entry: Dr Unearned Revenue $1,000; Cr Revenue $1,000 (this shifts the amount from liability to owner’s equity).

4. Why the correct answer is correct
- The deposit creates an obligation (liability) until the service is performed. Recognizing revenue immediately would violate the revenue recognition principle. Therefore the correct effect, aside from increasing cash, is to increase unearned revenue (a liability).

5. Why other options are incorrect
- "Increase owner’s equity (revenue)": Incorrect because revenue cannot be recognized until services are performed.
- "Decrease an asset (accounts receivable)": Incorrect because accounts receivable arise when revenue is earned on credit; a cash deposit increases, not decreases, an asset.
- "Increase an asset (revenue)": Incorrect because revenue is not an asset; it affects owner’s equity when earned.

Conclusion: The correct choice is increase a liability (unearned revenue), which matches the provided answer.

Suppose that a customer pays a deposit for work to be done next year. The business will increase an asset account (cash at bank) and will:单项选择题

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