Question

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as:

1) A debit to an asset and a credit to a revenue account.
2) A debit to a liability and a credit to a revenue account.
3) A debit to an asset and a credit to a liability account.
4) A debit to a revenue and a credit to an asset account.

Answer 1

The correct treatment for receiving advance payment is recording it as a debit to an asset (increasing assets) and a credit to a liability account (increasing liabilities), represented in option 3).

Step-by-step explanation:

When a customer pays in advance for a product or service, the advance payment received by the company is recorded as a debit to an asset and a credit to a liability account. This is because the company has received the cash, which increases its assets, but at the same time, it has incurred an obligation to provide a product or service in the future, which creates a liability. The correct answer is, therefore, option 3) A debit to an asset and a credit to a liability account. In accounting, this is recognized on the balance sheet and reflected in the T-account where the asset side increases due to the cash inflow, and the liability side increases due to the advance payment turning into a liability until the service or product is delivered.