A company performs $10,000 of services and issues an invoice to the customer. Using the accrual method. what’s the cored entry to record the transactions?
(A) Debit unearned revenue $10,000, credit salles revenue $10,000
(B) Debit accounts payable $10,000, credit sales revenue $10,000
(C) Debit services expense $10,000, credit sales revenue $10,000
(D) Debit cash $10,000, credit sales revenue $10,000
(E) Debit accounts receivable $10,000, credit salles revenue $10,000
The Correct Answer and Explanation is :
The correct answer is:
(E) Debit accounts receivable $10,000, credit sales revenue $10,000
Explanation:
Under the accrual accounting method, revenue is recorded when it is earned, regardless of when cash is received. In this scenario, the company has provided services worth $10,000 to a customer, meaning the revenue has been earned. Since the company has issued an invoice but has not yet received payment, the amount is classified as accounts receivable, representing money owed to the company by the customer.
The Journal Entry:
- Debit Accounts Receivable $10,000:
- The company recognizes that it has a legal right to receive payment from the customer.
- Accounts receivable is an asset, and assets increase with a debit.
- Credit Sales Revenue $10,000:
- This reflects the earned income from providing the services.
- Revenue increases equity, and it is recorded as a credit.
Why Other Answers Are Incorrect:
- (A) Debit unearned revenue, credit sales revenue:
Unearned revenue is used when a company receives cash before providing services. In this case, services are already performed, so unearned revenue is not relevant. - (B) Debit accounts payable, credit sales revenue:
Accounts payable represents amounts the company owes to others (liabilities). This transaction doesn’t involve the company owing money. - (C) Debit services expense, credit sales revenue:
Service expenses relate to costs incurred to deliver services, not the revenue generated. - (D) Debit cash, credit sales revenue:
Cash is debited only when payment is received. Here, the company issued an invoice but hasn’t received cash yet.
Using this entry ensures the financial statements properly reflect the revenue earned and the amount owed to the company. This is a fundamental principle of the accrual method and adheres to Generally Accepted Accounting Principles (GAAP).