Question

In late August, a company provided one of its customers with services worth $500; however, the...

In late August, a company provided one of its customers with services worth $500; however, the company does not expect payment from the customer for those services until early September. What adjustment should the company make in August to denote this delivery of services?

  • A : The company should increase both Accounts Receivable and Service Revenue for $500.

  • B : The company should decrease both Accounts Receivable and Service Revenue for $500.

  • C : The company should increase Accounts Receivable for $500 and decrease Service Revenue for $500.

  • D : The company should decrease Accounts Receivable for $500 and increase Service Revenue for $500.

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Answer #1

Option (A) is correct

The company should increase both accounts receivable and service revenue for $500.

Here, the services have been performed and completed in the month of August. Revenue from the services is also measurable reliably. It is also probable that the economic benefits associated with this transaction will flow to the seller, after early September. All the above conditions of revenue recognition from services are present here. So this should be recognized as service revenue for the month of August. Because it is now recognized as the service revenue for the month of August but the payment will not be received until early September, so it should be added to the accounts receivables.

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