Question:
When a customer pays in advance for a product or service such as a prepaid insurance policy, the business that sold the item will record the cash received as an asset and the future obligation to provide the item as a liability. Please give some thought to different business situations where the customers may pay in advance and provide an example here.
1. Using your example, which account is debited to record the payment received? Which account is credited?
2. When the business provides the product or service, which account is debited? Which account is credited?
3. What do we mean by the term "deferred revenue"?
4. How would these transactions be recorded under the cash basis of accounting? What are the benefits of recording the deferral under the accrual basis?