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College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570

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BuyFindarrow_forward

College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570
Textbook Problem

You have a friend who is a seamstress specializing in Renaissance costumes. She receives cash well in advance of the required date, often in the fiscal period prior to the date of delivery of the costume, not only to enable her to purchase material but also to cover her labor. She always debits Cash and credits Costume Income. First, explain to her why this entry violates the revenue recognition principle. Second, identify the classification of Unearned Revenue. Third, explain when the Unearned Revenue account is used.

To determine

Explain the unearned revenue and identify the account type for unearned revenue.

Explanation

Unearned revenue: The revenue which is received in advance by the company for the services or goods to be delivered in future is referred to as unearned revenue. Since the revenue is received for the services not yet performed, the revenue is recorded as a liability until the services are performed. After the services are performed, the liability would be reduced and the revenue would be credited...

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