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.