Under accrual accounting, a business that receives cash in advance of performing a service for a client will: Question 5 Answer Record it as accrued income Record it as prepaid income Record it as an accrued expense Record it as a prepaid expense
Question
Under accrual accounting, a business that receives cash in advance of performing a service for a client will: Question 5 Answer
Record it as accrued income
Record it as prepaid income
Record it as an accrued expense
Record it as a prepaid expense
Solution
The correct answer is: Record it as prepaid income.
Here's why:
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Under accrual accounting, income and expenses are recorded when they are earned or incurred, not when cash is received or paid.
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When a business receives cash in advance of performing a service, it has not yet earned that income. Therefore, it cannot record it as accrued income.
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Instead, the business records the cash received as prepaid income. This is a liability on the business's balance sheet, representing the obligation to perform the service in the future.
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Once the service is performed, the business can then record the income as earned.
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The options of recording it as an accrued expense or a prepaid expense are not correct because they relate to expenses, not income. An accrued expense is an expense that has been incurred but not yet paid, while a prepaid expense is an expense that has been paid in advance of it being incurred.
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