Hi all, Hope I can get some advice from the CPAs and other accounts out there. Have a question from Q-Bank: Q: Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect Washburn’s assets and liabilities? A: The answer says that Assets will increase because cash goes up, and Liabilities go up because of unearned revenue increasing. No problems with the answer there. But I was wondering why there is no mention of accounts receivable. Is my understanding correct: (A) +20,000 (Cash) + 80,000 (Accounts Receivable) (L) +100,000 (Unearned Revenue)?
You still haven’t provide the services yet so this will be treated as Unearned (Deffered) Revenue , Since you recieved some cash already that you book in your cash accounts (Debit) but at the same time you book (credit) your Unearned revenue which is also a liability… So the process will be like (1) When you just recieved the down payment and haven’t provided services Cash account Increases (Debit-Asset) 20,000 Unearned Revenue (Credit-Liability) -20,000 Then after you provide the services you do the opposite adjustment and debit unearned revenue and now credit and Increase revenue… This 20,000 is already in cash reciepts but the after the end of month if the company deliver cars (Provides and realizes revenue) and yet not recieve the remaining cash then you increase the remaining amount to Accounts recieable 80,000 (which from above method is correct) If the cash is collected then is simple transaction you again increase cash with 80,000 and since all cash is collected no A/R