Question

BellTower Company collected $13,000 in June of 2019 for 7 months of service which would take place from October of 2019 through April of 2020. What's the impact of Belltower's June collection of this money on the Balance Sheet?

Answer 1

When the company follows the accrual system of accounting the revenue and expenses recorded in the accounts i.e income statement or balancesheet are the transaction which has actually earned or incurred the unearned and prepaid amount are deferred accordingly in the balancesheet as liabilities or asssets depending upon the nature of transaction.

Here in the given case, Belltower company has received in advance $ 13,000 in June for which the services to be provided from October to April of next year.

Now, when the advance is received for which no services have been provided is not directly treated as revenue but it is transferred to balancesheet liabilities as unearned revenue service, which will be reversed at the year end to the extent of service actually performed. Here the unearned revenue nature is of liabilities as the performance obligation arises once the advance is received.

The effect on the balancesheet being increase in assets as cash comes in the business and a corresponding increase in liabilities as the unearned service revenue obligation arises at the same time which is to be fulfilled in future period. Thus the impact on balancesheet being an increase in assets with a corresponding increase in liabilities. No effect will be in income statement as of june 2019.