When cash is received before performance, which entry records the initial receipt for unearned revenue?

When cash is received before performance, which entry records the initial receipt for unearned revenue?

• A. Debit Unearned Revenue; Credit Revenue
• B. Debit Cash; Credit Unearned Revenue
• C. Debit Revenue; Credit Cash
• D. Debit Cash; Credit Revenue

Answer: (B)

When cash is received before you’ve performed, you’ve gained an asset (cash) and created a future obligation (unearned revenue, a liability). The proper initial entry is to Debit Cash and Credit Unearned Revenue. This shows the cash received while recording that you must deliver goods or perform services later. Later, as you fulfill the obligation, you’d Debit Unearned Revenue and Credit Revenue to recognize the income. Entries that debit Unearned Revenue or credit Revenue at receipt would prematurely change a liability or recognize revenue before it’s earned, which isn’t correct.

When cash is received before you’ve performed, you’ve gained an asset (cash) and created a future obligation (unearned revenue, a liability). The proper initial entry is to Debit Cash and Credit Unearned Revenue. This shows the cash received while recording that you must deliver goods or perform services later. Later, as you fulfill the obligation, you’d Debit Unearned Revenue and Credit Revenue to recognize the income. Entries that debit Unearned Revenue or credit Revenue at receipt would prematurely change a liability or recognize revenue before it’s earned, which isn’t correct.