Question

Whether an adjustment is accrued or deferred is key when recording it?

Answer 1

To explain the above question in detail, we will initially look into the meaning of each term in the question namely - Adjustment, Accrued, Deferred.

1. Adjustment :

There are cases when some cash has been received by the business in advance. This means that the revenue has been received without the service being provided. Also, there can be cases when cash has not been received for the services rendered during a period. That is, earned revenue has not been received in monetary value.

In both cases the revenue or the service provided are a part of a particular accounting period and should be recorded as part of that period.

This is the scenario where adjustment entries are a useful tool.

2. Accrued Revenue or expense:

This is the revenue or expense for which payment is due, but has not been received or paid.

3. Deferred revenue or expense:

The revenue or expense for which money has been paid or received in advance.

Thus, keeping in mind the above definitions it can be said that to know whether an adjustment is accrued or deferred is important while recording it in the books of accounts.

• Accrued expense - Expense account is debited
• Accrued revenue - Revenue account is credited
• Deferred expense - Revenue account is debited
• Deferred revenue - Expense account is credited

Hence, it is important to know whether the adjustment is accrued or deferred while recording it.