On October 1, a client pays a company the full \$12,000 in advance for services to be provided over the next 12 months. Which of the following is the correct journal entry to record this transaction?

• A. Debit Unearned Revenue \$12,000; Credit Service Revenue \$12,000
• B. Debit Accounts Receivable \$12,000; Credit Service Revenue \$12,000
• C. Debit Service Revenue \$12,000; Credit Cash \$12,000
• D. Debit Cash \$12,000; Credit Unearned Revenue \$12,000

Answer: (D)

Verified step by step guidance

1. Understand the nature of the transaction: The client is paying \$12,000 in advance for services that will be provided over the next 12 months. This means the company has received cash but has not yet earned the revenue, as the services are to be provided in the future.
2. Identify the accounts involved: Since the company is receiving cash, the 'Cash' account will be affected. Additionally, because the revenue has not yet been earned, the company must record a liability called 'Unearned Revenue' to reflect the obligation to provide services in the future.
3. Determine the type of accounts: 'Cash' is an asset account, and it increases when the company receives money. 'Unearned Revenue' is a liability account, and it increases when the company receives payment for services not yet performed.
4. Apply the rules of debits and credits: To increase an asset account like 'Cash,' you debit it. To increase a liability account like 'Unearned Revenue,' you credit it.
5. Record the journal entry: Debit the 'Cash' account for \$12,000 to reflect the increase in cash. Credit the 'Unearned Revenue' account for \$12,000 to reflect the increase in the company's liability to provide services in the future.