Page 127 - Accounting Principles (A Business Perspective)

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Assets
Trucks USD 40,000
Less: Accumulated deprecation 750
USD 39,250
As you may expect, the accumulated depreciation account balance increases each period by the amount of
depreciation expense recorded until the remaining book value of the asset equals the estimated residual value.
A liability/revenue adjustment involving unearned revenues covers situations in which a customer has
transferred assets, usually cash, to the selling company before the receipt of merchandise or services. Receiving
assets before they are earned creates a liability called unearned revenue. The firm debits such receipts to the
asset account Cash and credits a liability account. The liability account credited may be Unearned Fees, Revenue
Received in Advance, Advances by Customers, or some similar title. The seller must either provide the services or

return the customer’s money. By performing the services, the company earns revenue and cancels the liability.
Companies receive advance payments for many items, such as training services, delivery services, tickets, and
magazine or newspaper subscriptions. Although we illustrate and discuss only advanced receipt of training fees,
firms treat the other items similarly.
Unearned service fees On December 7, MicroTrain Company received USD 4,500 from a customer in
payment for future training services. The firm recorded the following journal entry:

2010
Dec. 7 Cash 4,500
Unearned Service Fees 4,500
To record the receipt of cash from a customer in payment
for future training services.
The two T-accounts relating to training fees are Unearned Service Fees (a liability) and Service Revenue. These
accounts appear as follows on 2010 December 31 (before adjustment):
(Dr.) Unearned Service Fees (Cr.)
2010
Dec. 7 Cash received
in advance 4,500
(Dr.)
Service Revenue (Cr.)
2010
*The $10,700 balance came Bal. before adjustment 10,700*
from transactions discussed in Chapter 2.
The balance in the Unearned Service Fees liability account established when MicroTrain received the cash will

be converted into revenue as the company performs the training services. Before MicroTrain prepares its financial
statements, it must make an adjusting entry to transfer the amount of the services performed by the company from
a liability account to a revenue account. If we assume that MicroTrain earned one-third of the USD 4,500 in the
Unearned Service Fees account by December 31, then the company transfers USD 1,500 to the Service Revenue
account as follows:
2010
Dec.
Adjustment 5— 31 Unearned Service Fees 1,500
Revenue earned Service Revenue 1,500
To transfer a portion of training fees from the liability
account to the revenue account.

After posting the adjusting entry, the T-accounts would appear as follows:
Decreased by (Dr.) Unearned Service Fees (Cr.)
$1,500
2010 2010

Accounting Principles: A Business Perspective 128 A Global Text