Question

Which of the following is correct when a company receives cash from customers before products or services are provided?

• Assets and stockholders' equity increase.

• Liabilities and assets increase.

• Liabilities and revenues increase.

• Assets and revenue increase.

Answer 1

The answer is Liability and Asset increases.

Here, When a company receives cash from customers before producats or services are provided is know as Prepaid income or unearned revenue. Following is the journal entry for the prepaid income is

Cash or Bank A/c dr

Unearned Revenue A/c

Here cash or bank account is classified as Asset (Current Asses) is increasing while geting the payment from the such customers. The current asset has debit balances in their nature.

Here Unearned revenue is classified as Liability is increasing while unearned revenue recording. Liability has credit balances in the nature.Here unearned revenue classified as liability means it is an obligation to the unit till income is performing.