Jenny’s Bakery was paid $500 in July to bake a wedding cake in August. Assuming Jenny’s Bakery operates on a normal monthly accounting cycle and on an accrual basis, in July her accountant will record the $500 payment as:
Explanation
Answer -D - In July, Jenny’s accountant will record the $500 as unearned revenue. Jenny had not yet baked the cake, so that order has not yet been filled.
Key Takeaway: Under the accrual basis of accounting, revenues and expenses are recognized in the period that they are earned. Unearned revenue is counted as a liability until the service or product has been provided. Once the service or product is provided, the liability is decreased and the revenue is recognized, which will increase the revenue account.
