Question

The adjusting entry to recognize work completed on unearned revenue involves which of the following?

Multiple Choice

An increase in assets and a decrease in liabilities

An increase in liabilities and a decrease in equity

A decrease in liabilities and an increase in equity

A decrease in assets and a decrease in liabilities

Answer 1

Answer is option (A decrease in liabilities and an increase in equity).

Explanation;

Following adjusting entry is made to recognize work completed on unearned revenue;

	Debit	Credit
Unearned revenue
Service revenue

So on the basis of above adjusting entry it is clear that for recognizing work completed on unearned revenue we need to debit unearned revenue (liability) account hence liabilities will be decreased and on other hand recognized revenue will be reported hence it will increase revenue that will utimately lead to an increase in retained earnings, And we know that retained earnings is the part of equity hence equity will increase.

So at the time of recognizing work completed on unearned revenue, liabilities will be decreased and equity will be increased.