Law Firm Financial Transaction: Recording Advance Payments
How should a law firm record advance payments received for work to be performed in the future?
Which of the following general journal entries will the firm make to record this transaction?
A. Debit Accounts Receivable, $3200; credit Unearned Revenue, $3200
B. Debit Cash, $3200; credit Unearned Revenue, $3200
C. Debit Services Revenue, $3200; credit Accounts Receivable, $3200
D. Debit Cash, $3200; credit Accounts Receivable, $3200
E. Debit Accounts Receivable, $3200; credit Service Revenue, $3200
Answer:
The law firm will make the following general journal entry to record the transaction:
Debit Cash, $3,200; Credit Unearned Revenue, $3,200
When a law firm receives an advance payment for work to be performed in the future, it needs to record the transaction in its general journal. In this case, the law firm collected $3,200 in advance.
The appropriate journal entry to record this transaction is:
Debit Cash, $3,200: This increases the firm's cash balance as it received the payment.
Credit Unearned Revenue, $3,200: This records the liability for the advance payment received. Unearned revenue represents the firm's obligation to perform the work in the future.
By making this journal entry, the law firm properly records the advance payment and ensures accurate financial reporting.