In November Craig received $225 from Kate Whelan as a customer prepayment for design work. Craig recorded the entire $225 as Design Income. At the end of the accounting period to Kate, so the $225 had not been earned as of year end. Since it had not been earned, the $225 is a liability because Craig has an obligation to provide the design service or return the $225 to the customer. So an adjusting entry is needed to bring accounts up to date at December 31.

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In November Craig received $225 from Kate Whelan as a customer prepayment for design work. Craig recorded the entire $225 as Design Income. At the end of the accounting period to Kate, so the $225 had not been earned as of year end. Since it had not been earned, the $225 is a liability because Craig has an obligation to provide the design service or return the $225 to the customer. So an adjusting entry is needed to bring accounts up to date at December 31.

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Trial Balance and Adjustement Entries

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