Question 2 Explanation

Question #2: On March 1st, a customer paid Steez Inc. $33,000 cash in advance for 3 months of fashion services that Steez Inc. would perform for the customer at a rate of $11,000 per month, with the service starting to be provided on March 1st. What is the entry that Steez Inc. makes to its accounting system on March 1st to record the receipt of advance payment?

Answer

D)

TransactionDebitCredit
Cash33,000
     Unearned Revenue33,000

Explanation

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

TransactionDebitCredit
Cash???
     ??????

How much is the customer paying Steez Inc.?

Question #2: On March 1st, a customer paid Steez Inc. $33,000 cash in advance for 3 months of fashion services that Steez Inc. would perform for the customer at a rate of $11,000 per month, with the service starting to be provided on March 1st. What is the entry that Steez Inc. makes to its accounting system on March 1st to record the receipt of advance payment?

$33,000, therefore we'll debit Cash by that amount.

TransactionDebitCredit
Cash$33,000
     ??????

The next thing to understand here is that when the customer pays Steez Inc. the $33,000 in advance for services to be performed, the $33,000 does not represent revenue yet since Steez Inc. has 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.

TransactionDebitCredit
Cash$33,000
     Unearned Revenue???

By how much are we crediting it? The entire $33,000 amount that the customer paid us!

TransactionDebitCredit
Cash$33,000
     Unearned Revenue$33,000

This final answer matches answer choice D!

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