For financial bookkeeping, a contractor receives $18,000 as a customer advance for services not yet performed. Assume revenue recognition requires performance and the contractor still owes the service or a refund. How is the unearned advance classified?
Correct Answer
A) Liability until earned.
Under the stated conditions, record the advance as a liability while the service or refund obligation remains. Receiving cash alone does not create earned revenue. This question does not decide tax recognition of advance payments or whether a home improvement deposit is legally permitted.
Why This Is the Correct Answer
Under the stated conditions, record the advance as a liability while the service or refund obligation remains. Receiving cash alone does not create earned revenue. This question does not decide tax recognition of advance payments or whether a home improvement deposit is legally permitted.
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