Accounting: Service Revenue Recognition
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Questions and Answers

What are the four criteria that must be met to recognize revenue?

  • Collectibility is reasonably assured, persuasive evidence of an arrangement does not exist, delivery has not occurred or services have not been rendered, and fees are not fixed or determinable
  • Persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, fees are fixed or determinable, and collectibility is reasonably assured (correct)
  • Delivery has occurred or services have been rendered, fees are fixed or determinable, collectibility is reasonably assured, and persuasive evidence of an arrangement does not exist
  • Fees are fixed or determinable, collectibility is reasonably assured, persuasive evidence of an arrangement exists, and delivery has not occurred or services have not been rendered

    • Which account would be debited when a company provides consulting services to a client and receives $1,000 cash?

  • Cash (correct)
  • Accounts Receivable
  • Accounts Payable
  • Service Revenue

    • Where is service revenue reported on the financial statements?

  • Statement of Stockholders' Equity
  • Cash Flow Statement
  • Income Statement (Statement of Comprehensive Income) (correct)
  • Balance Sheet

    • What is the effect of debiting Accounts Receivable and crediting Service Revenue?

    <p>Increase Assets and Increase Equity</p> Signup and view all the answers

    What is the purpose of the initial entry when a company provides consulting services to a client but has not yet received payment?

    <p>To recognize revenue when services are rendered</p> Signup and view all the answers

    What is the subsequent entry when a company receives payment from a client for services previously rendered?

    <p>Debit Cash, Credit Accounts Receivable</p> Signup and view all the answers

    What is the total amount of cash collected during the period?

    <p>P35, 000</p> Signup and view all the answers

    What is the effect on assets when Ricca invested equipment in the business?

    <p>Increase</p> Signup and view all the answers

    What is the ending balance of cash?

    <p>P79, 500</p> Signup and view all the answers

    What is the amount paid to the supplier?

    <p>P10, 000</p> Signup and view all the answers

    What is the amount invested by Maria in the bakeshop in Baguio City?

    <p>P500, 000</p> Signup and view all the answers

    Which account records purchases on credit or payable due to suppliers?

    <p>Accounts Payable</p> Signup and view all the answers

    What is the characteristic of nominal accounts?

    <p>They include assets, liabilities, and equity accounts</p> Signup and view all the answers

    What is the effect of a debit entry on the cash account?

    <p>Increase in cash account</p> Signup and view all the answers

    What is the purpose of a sales journal?

    <p>To record sales of merchandise on account</p> Signup and view all the answers

    What is the effect of a trial balance on errors in the accounting system?

    <p>It reveals errors in the accounting system</p> Signup and view all the answers

    What is the effect of a purchase of equipment in cash on total assets?

    <p>Increase in total assets</p> Signup and view all the answers

    Study Notes

    Service Revenue

    Revenue Recognition

    • Service revenue is recognized when earned, regardless of when payment is received
    • Four criteria must be met to recognize revenue:
      1. Persuasive evidence of an arrangement exists
      2. Delivery has occurred or services have been rendered
      3. Fees are fixed or determinable
      4. Collectibility is reasonably assured

    Journal Entries

    • Debit: Cash (or Accounts Receivable) for the amount received
    • Credit: Service Revenue for the amount earned
    • Example: Provided consulting services to a client and received $1,000 cash
      • Debit: Cash, $1,000
      • Credit: Service Revenue, $1,000

    Financial Reporting

    • Service revenue is reported on the Income Statement (Statement of Comprehensive Income)
    • Classified as operating revenue
    • Presented separately from non-operating revenues

    Debits and Credits

    • Debits:
      • Increase Assets (e.g., Cash, Accounts Receivable)
      • Increase Expenses
      • Decrease Liabilities
      • Decrease Equity
    • Credits:
      • Increase Liabilities
      • Increase Equity
      • Decrease Assets
      • Decrease Expenses

    Accounting Entries

    • Initial Entry: Debit Accounts Receivable, Credit Service Revenue (for services rendered but not yet received)
    • Subsequent Entry: Debit Cash, Credit Accounts Receivable (when payment is received)
    • Example:
      • Initial Entry: Debit Accounts Receivable, $1,000; Credit Service Revenue, $1,000
      • Subsequent Entry: Debit Cash, $1,000; Credit Accounts Receivable, $1,000

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    Description

    Test your understanding of service revenue recognition, journal entries, financial reporting, and debits and credits in accounting. Learn how to recognize and record service revenue correctly.

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