Question

For a discussion forum post that provides one example for each of the four adjusting entries you learned. For instance, you are to post a scenario that would represent an accrued revenue adjusting entry. You will then complete a scenario for the remaining three adjusting entries: accrued expenses, prepaid assets (deferred expenses), and deferred revenues.

Answer 1

Accrued irevenue irefers ito ia icompany's irevenue ithat ihas ibeen iearned ithrough ia isale ithat ihas ialready ioccurred, ibut ithe icash ihas inot iyet ibeen ireceived ifrom ithe ipaying icustomer.

When iaccrued irevenue iis iinitially irecorded, ithe iamount iof iaccrued irevenue iis irecognized ion ithe iincome istatement ias irevenue, iand ian iassociated iaccrued irevenue iaccount ion ithe icompany's ibalance isheet iis idebited iby ithe isame iamount, ipotentially iin ithe iform iof iaccounts ireceivable.

When ipayment iis idue, iand ithe icustomer imakes ithe ipayment, ian iaccountant ifor ithat icompany iwould irecord ian iadjustment ito iaccrued irevenue. iThe iaccountant iwould imake ian iadjusting ijournal ientry iin iwhich ithe iamount iof icash ireceived iby ithe icustomer iwould ibe idebited ito ithe icash iaccount ion ithe ibalance isheet, iand ithe isame iamount iof icash ireceived iwould ibe icredited ito ithe iaccrued irevenue iaccount ior iaccounts ireceivable iaccount, ireducing ithat iaccount.

When iit icomes ito ioperating ia ibusiness, isome iof ithe imost iimportant imetrics ito itrack iinclude ithe iamount iof irevenue icoming ithrough ithe idoor, iand iwhether ithat's isufficient ito ipay ifor ithe ivarious icosts iincurred ithrough ioperating ithe ibusiness. iWhile irevenue iis ieasy ito ithink iabout ias i"automatic" iwhen ithe isale iof ia igood ior iexchange iof iservice ihappens, iin ireality, irevenue iis inot ialways ias iliquid ias iit iseems. iOnly iwhen irevenue iis ireceived iin ithe iform iof ian iimmediate icash ipayment idoes iit itruly iqualify ias irevenue. iInstead, iaccrued irevenues iare imore ilikely ifor ia ibusiness, iespecially iwhen iit icomes ito iaccounting ibest ipractices. iTypically, ian iaccountant iwill irecord iadjustments ifor iaccrued irevenues ithrough idebit iand icredit ijournal ientries iin idefined iaccounting iperiods. iThis ihelps iaccount ifor iaccrued irevenues iaccurately iand iso ithat ithe ibalance isheet iremains iin ibalance.

An iaccrued iexpense iis ian iaccounting iterm ithat irefers ito ian iexpense ithat iis irecognized ion ithe ibooks ibefore iit ihas ibeen ipaid; ithe iexpense iis irecorded iin ithe iaccounting iperiod iin iwhich iit iis iincurred.. iBecause iaccrued iexpenses irepresent ia icompany's iobligation ito imake ifuture icash ipayments, ithey iare ishown ion ia icompany's ibalance isheet ias icurrent iliabilities; iaccrued iexpenses iare ialso iknown ias iaccrued iliabilities. iAn iaccrued iexpense iis ionly ian iestimate, iand iwill ilikely idiffer ifrom ithe isupplier’s iinvoice ithat iwill iarrive iat ia ilater idate.

An iexample iof ian iaccrued iexpense iis iwhen ia icompany ipurchases isupplies ifrom ia ivendor ibut ihas inot iyet ireceived ian iinvoice ifor ithe ipurchase. iOther iforms iof iaccrued iexpenses iinclude ineither iinterest ipayments ion iloans, iwarranties ion iproducts ior iservices ireceived, iand itaxes; iall iof iwhich ihave ibeen iincurred ior iobtained, ibut ifor iwhich ino iinvoices ihave ibeen ireceived inor ipayments imade. iEmployee icommissions, iwages, iand ibonuses iare iaccrued iin ithe iperiod ithey ioccur ialthough ithe iactual ipayment iis imade iin ithe ifollowing iperiod.

A ideferred iexpense iis ia icost ithat ihas ialready ibeen iincurred, ibut iwhich ihas inot iyet ibeen iconsumed. iThe icost iis irecorded ias ian iasset iuntil isuch itime ias ithe iunderlying igoods ior iservices iare iconsumed; iat ithat ipoint, ithe icost iis icharged ito iexpense. iA ideferred iexpense iis iinitially irecorded ias ian iasset, iso ithat iit iappears ion ithe ibalance isheet i(usually ias ia icurrent iasset, isince iit iwill iprobably ibe iconsumed iwithin ione iyear).

From ia ipractical iperspective, iit imakes ilittle isense ito idefer ithe iexpenses iassociated iwith ismaller iamounts iof iunconsumed igoods iand iservices, isince ithe iaccountant imust imanually ienter ithe ideferral iin ithe iaccounting isoftware i(rather ithan ito ithe ipredetermined iexpense iaccount), ias iwell ias iremember ito icharge ithese iitems ito iexpense iat ia ilater idate. iInstead, icharge ithese iitems ito iexpense iimmediately, ias ilong ias ithere iis ino imaterial ieffect ion ithe ifinancial istatements. iThis iapproach ireserves ionly ilarger itransactions ifor ideferral itreatment. i iA igood iexample iof iitems ithat iare inot inecessarily iconsumed iat ionce, ibut iwhich iare icharged ito iexpense iimmediately iare ioffice isupplies.

As ian iexample iof ia ideferred iexpense, iABC iInternational ipays i$10,000 iin iApril ifor iits iMay irent. iIt idefers ithis icost iat ithe ipoint iof ipayment i(in iApril) iin ithe iprepaid irent iasset iaccount. iIn iMay, iABC ihas inow iconsumed ithe iprepaid iasset, iso iit icredits ithe iprepaid irent iasset iaccount iand idebits ithe irent iexpense iaccount.

Deferred irevenue irefers ito ipayments ireceived iin iadvance ifor iservices iwhich ihave inot iyet ibeen iperformed ior igoods iwhich ihave inot iyet ibeen idelivered. iThese irevenues iare iclassified ion ithe icompany's ibalance isheet ias ia iliability iand inot ias ian iasset.

Deferred irevenue, ialso iknown ias iunearned irevenue, irefers ito iadvance ipayments ia icompany ireceives ifor iproducts ior iservices ithat iare ito ibe idelivered ior iperformed iin ithe ifuture. iThe icompany ithat ireceives ithe iprepayment irecords ithe iamount ias ideferred irevenue, ia iliability, ion iits ibalance isheet.

Deferred irevenue iis irecognized ias ia iliability ion ithe ibalance isheet iof ia icompany ithat ireceives ian iadvance ipayment. iThis iis ibecause iit ihas ian iobligation ito ithe icustomer iin ithe iform iof ithe iproducts ior iservices iowed. iThe ipayment iis iconsidered ia iliability ito ithe icompany ibecause ithere iis istill ithe ipossibility ithat ithe igood ior iservice imay inot ibe idelivered, ior ithe ibuyer imight icancel ithe iorder. iIn ieither icase, ithe icompany iwould ineed ito irepay ithe icustomer, iunless iother ipayment iterms iwere iexplicitly istated iin ia isigned icontract.

Deferred irevenue iis icommon iwith isubscription-based iproducts ior iservices ithat irequire iprepayments. iExamples iof iunearned irevenue iare irent ipayments ireceived iin iadvance, iprepayment ireceived ifor inewspaper isubscriptions, iannual iprepayment ireceived ifor ithe iuse iof isoftware, iand iprepaid iinsurance.

Typically, ias ia icompany idelivers iservices ior iproducts, ideferred irevenue iis igradually irecognized ion ithe iincome istatement ito ithe iextent ithe irevenue iis i"earned." iCategorizing ideferred irevenue ias iearned irevenue itoo iquickly, ior isimply ibypassing ithe ideferred irevenue iaccount iall itogether iand iposting iit idirectly ito irevenue ion ithe iincome istatement, iis iconsidered iaggressive iaccounting iand ieffectively ioverstates isales irevenue.

Deferred irevenue iis itypically ireported ias ia icurrent iliability ion ia icompany's ibalance isheet, ias iprepayment iterms iare itypically ifor i12 imonths ior iless. iHowever, iif ia icustomer imade ian iup-front iprepayment ifor iservices ithat iare iexpected ito ibe idelivered iover iseveral iyears, ithe iportion iof ithe ipayment ithat ipertains ito iservices ior iproducts ito ibe iprovided iafter i12 imonths ifrom ithe ipayment idate ishould ibe iclassified ias ideferred irevenue iunder ithe ilong-term iliability isection iof ithe ibalance isheet.