On September 1, Peterson Maintenance Company contracted to provide monthly maintenance services for the next eight months at a rate of $2600 per month. The client paid Peterson $20,800 on September 1. Assuming Peterson records deferred revenues using the alternative treatment, what would be the entry on September 1?

See explanation section

Explanation:

The journal entry to record the transaction of receiving advance cash for service provided in the following months is as follows:

September 1  Cash                                      Debit     $20,800

                      Unearned Service revenue                     Credit     $20,800

As the client paid full in advance, cash account is debit. According to the revenue recognition principle, as the service is yet to perform, therefore, service revenue is not credit. Instead, Unearned Service revenue (A liability) arises.

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