What is the journal entry for John Deere when the contract is established for the harvester sale in advance?

When a contract is established for a sale, but the goods or services have not yet been delivered or provided, the appropriate accounting treatment is to recognize a liability for the amount received in advance. In this case, John Deere would not recognize Sales Revenue at this point because the revenue recognition principle states that revenue should only be recognized when it is earned, which, in this scenario, happens when the harvester is delivered to the customer.

Therefore, the correct journal entry involves crediting Unearned Sales Revenue, which is a liability account that reflects an obligation to provide a product or service in the future. By crediting Unearned Sales Revenue for $150,000, John Deere acknowledges that they have received payment but still owe the delivery of the harvester. This aligns with the matching principle, ensuring that revenue is recognized when earned and expenses are matched with associated revenues.

This reflects the company’s commitment to fulfill the contract, and the liability will be reduced when the sale is completed and revenue is recognized.