Question

A consultant collected 960 $ of consultancy fees in advance. She erroneously debited Cash for 690 $ and credited Accounts Receivable for 690 $. The correcting entry is

a) Debit Cash, 690 $ and Accounts Receivable, 270 $; Credit Unearned Revenue, 960 $.

b) Debit Cash, 960 $; Credit Service Revenue, 960 $.

c) Debit Cash, 270 $ and Accounts Receivable, 690 $; Credit Unearned Revenue, 960 $.

d) Debit Cash, 270 $; Credit Accounts Receivable, 270 $.

Answer 1

c) Debit Cash, 270 $ and Accounts Receivable, 690 $; Credit Unearned Revenue, 960 $.

Explanation

As given in Questiom that she had receive cash in advance , ie she is yet to perform the services for which she receive cash , hence this is unearned income .

As per Accrual and matching system of accounting Income is to be recognise only when it is earned whether or not payment is receive. In Given cash she is yet to give comsulting service hence it is unearned income and for same entry will be

Cash Dr $960

To Unearned Revenue $960

(Being Payment receive for service to be provided infuture)

As she correctly recognize the Debit for Cash but she incorrectly credited Account receivable hence three error are their , first short debit of Cash balance by (960-690) $270 , second wrong credit to Account receivable account by $690 and no entry for Credit of unearned income hence entry will be pass for same by More debit to Cash balance by 270 , wrong credit of Account receivable will be reverse by Debiting it . And credit entry for unearned income.

Entry will be

CASH A/c Dr 270 .........(Totalling it to $960 =690+270)

Account Receivable Dr 690......( cancelling wrong credit entry)

To Unearned Revenue ....$960

( Being correcting entry for cash short recognise and account receivable wroungly credited and Advance receive against unearned revenue )