Harris Company performs a service over time. Revenue is earned each day the service is performed, but no entry is made until the end of the month. What is the correct adjusting entry for Harris to make? Select one: a. Accounts Receivable Service Revenue b. Unearned Revenue Cash c. Unearned Revenue Service Revenue d. Accounts Receivable Prepaid Revenue e. Service Revenue Accounts Receivable
The Correct Answer and Explanation is:
The correct adjusting entry for Harris Company is:
a. Accounts Receivable Service Revenue
Explanation:
Harris Company performs a service over time, earning revenue each day the service is performed. However, they only make an entry at the end of the month. This means that, as the service is being rendered, they accumulate the earned revenue but haven’t yet recorded it in the books.
The key here is to recognize that, even though revenue is earned gradually each day, Harris has not yet made the accounting entry to recognize it. Therefore, an adjusting entry is necessary to match the earned revenue with the period in which it was earned (the revenue recognition principle of accrual accounting).
- Accounts Receivable: Since Harris has earned revenue but has not yet been paid, they must recognize a receivable. This represents the amount the company is entitled to receive from customers for the service performed during the period.
- Service Revenue: The company must also recognize the revenue it has earned from providing the service. This follows the revenue recognition principle, which states that revenue should be recorded when it is earned, not when payment is received.
The adjusting entry at the end of the month will be:
Debit: Accounts Receivable (to recognize the amount owed by customers)
Credit: Service Revenue (to recognize the earned revenue).
This ensures that the company’s financial statements accurately reflect the service provided and the revenue earned during the accounting period, even though the payment has not yet been received.
