Question

Upon receipt of cash in advance from a customer, a company records revenue on the income statement.

Answer 1

"Upon receipt of cash in advance from a customer, a company records revenue on the income statement."

The above statement is FALSE.

Under the accrual basis of accounting, revenues received in advance of being earned are reported as a liability. If they will be earned within one year, they should be listed as a current liability.

When a company receives money in advance of earning it, the accounting entry is a debit to the asset Cash for the amount received and a credit to the liability account such as Customer Advances or Unearned Revenues.

As the amount received in advance is earned, the liability account should be debited for the amount earned and a revenue account should be credited. This is done through an adjusting entry.