Question

Cash of \(\$ 100\) received at the time the service was provided was journalized and posted as a debit to Cash \(\$ 100\) and a credit to Accounts Receivable \(\$ 100\). Assuming the incorrect entry is not reversed, the correcting entry is: a. debit Service Revenue \(\$ 100\) and credit Accounts Receivable \(\$ 100\). b. debit Accounts Receivable \(\$ 100\) and credit Service Revenue \(\$ 100\). c. debit Cash \(\$ 100\) and credit Service Revenue \(\$ 100\). d. debit Accounts Receivable \(\$ 100\) and credit Cash \(\$ 100\).

Short answer

The correcting entry is: debit Accounts Receivable $100 and credit Service Revenue $100 (Option b).

Step-by-step solution

Identify the Incorrect Original Entry

The original incorrect entry was a debit to Cash and a credit to Accounts Receivable, as follows: - Debit: Cash $100 - Credit: Accounts Receivable $100. However, the correct entry for cash received for services performed should have been a debit to Cash and a credit to Service Revenue.

Determine the Correct Entry

The correct entry when cash is received for services provided should be as follows: - Debit: Cash $100 - Credit: Service Revenue $100. This shows that we received cash and earned revenue from services.

Analyze the Error Impact

The incorrect entry mistakenly credits Accounts Receivable instead of Service Revenue. This means that accounts receivable was improperly increased while Service Revenue was never credited.

Develop the Correcting Entry

The correcting entry needs to reverse the incorrect credit to Accounts Receivable and properly credit Service Revenue instead. - Debit: Accounts Receivable $100 (to cancel out the incorrect credit) - Credit: Service Revenue $100 (to correctly record the revenue). This means the correct correcting entry is to debit Accounts Receivable and credit Service Revenue, which aligns with option b.

Key concepts

Accounts Receivable

Accounts Receivable refers to the money that is owed to a business by its customers for goods or services that were delivered but not yet paid for. In other words, it is an asset that will transform into cash when customers settle their dues. An essential element of accounts receivable is that it reflects the company's credit sales. When a service is provided on credit, the revenue is recorded as accounts receivable, meaning the company expects money in the future. However, if cash is received immediately as in the original exercise mistake, accounts receivable should not be credited. This distinction is crucial for accurate bookkeeping and financial statements.

Service Revenue

Service Revenue represents the income a company earns from providing services to its customers. Different from product-based sales, service revenue is accountancy for efforts or expertise offered to clients. When a business performs a service and receives cash immediately, it should properly record this transaction as service revenue. This important revenue account signifies that services have been performed and payment has been completed, reflecting both income generated and the company's ability to deliver its services. Understanding when to credit service revenue is vital; it recognizes the income in the financial records accurately, impacting financial analysis and decisions.

Double Entry Accounting

Double Entry Accounting is the fundamental concept behind the accounting system used worldwide. It ensures that every financial transaction affects at least two accounts in equal but opposite ways—one as a debit, and the other as a credit.This method maintains the accounting equation of \[\text{Assets} = \text{Liabilities} + \text{Equity}\]A transaction, say for providing a service and receiving cash, involves debiting (increasing) the cash account and crediting (increasing) the service revenue account. The practice helps in identifying errors easily, as all debits must equal all credits. In correcting journal entries like in the exercise, ensuring the adjustment reinstates balance via the double-entry rule is crucial for accuracy.