Larry the Lawyer is going to represent Bart’s Brewskies in an upcoming litigation. Bart is being sued for representing his brewskies as being non-alcoholic, when in fact, they were 80-proof. Larry has asked Bart for a retainer of $1,000 before he’ll even meet with Bart. Assuming the accrual basis of accounting is in play, that $1,000 is considered (for Larry):
Explanation
Answer - C - The payment from Bart to Larry is a receipt. It would not be considered a revenue until it is earned and services provided. It would not be an accounts receivable, as it was a cash payment.
Key Takeaway: In the accrual basis of accounting, revenue is not recognized until it is earned. Therefore, a retainer is only a cash receipt, not a revenue. It is important to remember that revenues are money earned; receipts are money that is received. The income statement reflects revenues, not cash receipts.
