Managing Cash Received in Advance at a Bed and Breakfast

As a company operates a bed and breakfast, customers are required to pay cash in advance equal to one-half of the rate for their stay when making reservations. Let's discuss how the bed and breakfast should account for $1,000 cash received from customers paying in advance of their reservation.

How should the bed and breakfast account for $1,000 cash received from customers paying in advance of the reservation?

When a customer makes a reservation at a bed and breakfast and pays cash in advance, the business should account for the $1,000 cash received by recognizing it as Unearned Revenue, a liability that will later be transformed into revenue as the service is provided.

Final answer:

A bed and breakfast should record $1,000 cash received in advance for reservations as Unearned Revenue, a liability that will later be transformed into revenue as the service is provided.

Explanation:

When a customer makes a reservation at a bed and breakfast and pays cash in advance, the business should account for the $1,000 cash received by recognizing it as Unearned Revenue (also known as Deferred Income) on the liability side of the balance sheet. Upon receipt of the cash, an entry should be made that debits the Cash account and credits the Unearned Revenue account.

As the service (the stay at the bed and breakfast) is provided, the Unearned Revenue will then be recognized as revenue on the income statement by debiting Unearned Revenue and crediting Revenue. The recognition of earned revenue matches the revenue with the period in which the service was provided, adhering to the accrual basis of accounting and the matching principle.