Question

A client has been using the Receive Payments screen to record payments on account from customers before jobs have been completed and invoices created.

At the financial period end, which steps should be taken to account for these credit balances within Accounts Receivable, assuming they are operating on an accrual basis?

1. Create invoices to clear the credits. Receive payments with a zero total, and match the credits to the invoices
2. Create a journal entry to debit Accounts Receivable, and credit a liability account within the Balance Sheet. Once saved, the journal entry should be reversed at the beginning of the next period
3. Create a journal entry to credit Accounts Receivable for each customer, and debit another asset account within the Balance Sheet. Once saved, the journal entry should be reversed at the beginning of the next period
4. Create a journal entry to debit Accounts Receivable, and credit unearned income within the Profit & Loss. Once saved, the journal entry should be reversed at the beginning of the next period

Answer 1

Unearned revenue is the receipt of amount for services which are yet to be performed or delivered.

The accounting procedure for recording this is:

1.Initially the receipts are recognised as a liability by crediting unearned revenue and debiting cash.

2. When the service is performed subsequently the unearned revenue is debited and revenue is recognised by crediting an Income A/c.

If the service is performed next year then the entry will be reversed at beginning of next year.

However here receipts received are credited to Accounts receivable so an adjusting entry would be:

Accounts receivable A/c Dr

To unearned revenue A/c

Explanation:

A debit to account receivable cancels the asset and the credit recognises a new liability.

When the service or job is performed or delivered the liability is debited and revenue is recognised.

Unearned Revenue A/c Dr

To sale of services A/c

( Any income A/c)

So based on the above explanation

ANSWER IS OPTION B