When Andy records an adjusting entry for deferred (unearned) revenue, which of the following actions should he take?

• A. Debit Revenue and credit Unearned Revenue
• B. Debit Cash and credit Revenue
• C. Debit Accounts Receivable and credit Unearned Revenue
• D. Debit Unearned Revenue and credit Revenue

Answer: (D)

Verified step by step guidance

1. Understand the concept of deferred (unearned) revenue: Deferred revenue refers to money received by a business for goods or services that have not yet been delivered or performed. It is recorded as a liability because the company owes the service or product to the customer.
2. Recognize the purpose of adjusting entries: Adjusting entries are made at the end of an accounting period to update account balances and ensure that revenues and expenses are recognized in the correct period according to the accrual basis of accounting.
3. Identify the impact of the adjustment: When the company delivers the goods or performs the services, the deferred revenue (liability) is reduced, and revenue is recognized. This reflects the fulfillment of the obligation to the customer.
4. Determine the correct accounts to adjust: To record the adjustment, you need to debit Unearned Revenue (to decrease the liability) and credit Revenue (to recognize the earned income). This aligns with the principle of revenue recognition.
5. Prepare the journal entry: The adjusting entry will involve debiting the Unearned Revenue account and crediting the Revenue account. This ensures that the liability decreases and the revenue increases, reflecting the completion of the service or delivery of goods.