A customer pays in advance for services that the business will provide next month. Under accrual accounting, the amount received is initially treated as:
Correct answer: D. A liability
- A. Revenue
- B. An expense
- C. Owner's equity
- D. A liability
Explanation
The business has received cash but still owes the customer services. Until the services are provided, the amount is unearned revenue and is reported as a liability.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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