Which of the following journal entries most accurately reflects the accounting treatment when your company fails to send an overnight delivery that was promised to a customer, resulting in the need to recognize a liability for the service not provided?

• A. Debit Service Revenue; Credit Unearned Revenue
• B. Debit Unearned Revenue; Credit Service Revenue
• C. Debit Accounts Receivable; Credit Cash
• D. Debit Cash; Credit Service Revenue

Answer: (A)

Verified step by step guidance

1. Understand the scenario: The company failed to deliver a promised service, which means it needs to recognize a liability for the unearned revenue. Unearned revenue represents money received for services not yet provided.
2. Review the journal entry options: The correct entry should reflect the reduction of service revenue (since the service was not provided) and the recognition of unearned revenue (a liability).
3. Analyze the correct accounting treatment: When a service is not provided, service revenue is reduced (debited) because the company cannot recognize it as earned revenue. Unearned revenue is increased (credited) to reflect the liability for the service obligation.
4. Eliminate incorrect options: For example, 'Debit Accounts Receivable; Credit Cash' and 'Debit Cash; Credit Service Revenue' do not relate to the recognition of unearned revenue. These entries are typically used for cash transactions or receivables, not for adjusting revenue and liabilities.
5. Select the correct journal entry: The correct entry is 'Debit Service Revenue; Credit Unearned Revenue,' as it accurately reflects the reduction in revenue and the recognition of a liability for the unearned service.