Question 2 Explanation

Question #2: On March 1st, a customer paid your lemonade stand \$3,000 cash in advance for 3 months of lemonade delivery service, performed for the customer at a rate of \$1,000 per month, with the service starting to be provided on March 1st.

What is the entry that you should make into your accounting system on March 1st to record the receipt of advance payment?

D)

Explanation

Since the customer paid us in cash, this increased the Cash account. The Cash account is an asset, therefore an increase results in a debit.

How much is the customer paying us?

Question #2: On March 1st, a customer paid your lemonade stand \$3,000 cash in advance for 3 months of lemonade delivery service, performed for the customer at a rate of \$1,000 per month, with the service starting to be provided on March 1st.

What is the entry that you should make into your accounting system on March 1st to record the receipt of advance payment?

\$3,000, therefore we'll debit Cash by that amount.

The next thing to understand here is that when the customer pays the lemonade stand the \$3,000 in advance for services to be performed, the \$3,000 does not represent revenue yet since we have not earned it by performing the services. Therefore, we'll place this amount of cash into the Unearned Revenue account.

The Unearned Revenue account is a liability, and since we're increasing that account, we must credit it.

By how much are we crediting it? The entire \$3,000 amount that the customer paid us!