Why is an adjusting entry for unearned revenue necessary, and how is it recorded?

Why is an adjusting entry for unearned revenue necessary, and how is it recorded?

• A. To recognize revenue that has been earned from amounts previously received; Debit Unearned Revenue, Credit Revenue.
• B. To record cash received; Debit Cash, Credit Revenue.
• C. To recognize expense; Debit Unearned Revenue, Credit Expense.
• D. To reduce revenue; Debit Revenue, Credit Unearned Revenue.

Answer: (A)

Unearned revenue starts as a liability when cash is received before earning the revenue. At period end, you adjust to record the portion actually earned and reduce the liability. The correct entry debits Unearned Revenue (reducing the liability) and credits Revenue (increasing earned income). This aligns revenue with the period it is earned and removes the liability as the service is provided. For example, if $1,200 is received in advance for a year of service and one month has passed, the adjusting entry would be Debit Unearned Revenue and Credit Revenue for $100. This recognizes the revenue earned in the current period and lowers the unearned-revenue liability. The other options aren’t correct because recording cash received is an initial recognition, not an end-of-period adjustment; recognizing an expense isn’t appropriate for unearned revenue; and debiting revenue would reduce revenue, which is the opposite of what happens when you recognize earned revenue.

Unearned revenue starts as a liability when cash is received before earning the revenue. At period end, you adjust to record the portion actually earned and reduce the liability. The correct entry debits Unearned Revenue (reducing the liability) and credits Revenue (increasing earned income). This aligns revenue with the period it is earned and removes the liability as the service is provided.

For example, if $1,200 is received in advance for a year of service and one month has passed, the adjusting entry would be Debit Unearned Revenue and Credit Revenue for $100. This recognizes the revenue earned in the current period and lowers the unearned-revenue liability.

The other options aren’t correct because recording cash received is an initial recognition, not an end-of-period adjustment; recognizing an expense isn’t appropriate for unearned revenue; and debiting revenue would reduce revenue, which is the opposite of what happens when you recognize earned revenue.