Question

Discussion question:
What are the four types of adjustments. Give a specific example of each.

Answer 1

Four types of adjustments are:

1. Accrued revenue - Revenue earned but not yet recognized and cash will be received in future. Example: Accrued interest revenue. Account debited interest receivable and account credited interest revenue.

2. Accrued expense - Expenses incurred but not yet recognized and cash will be paid in future. Example: Accrued salary expense. Account debited interest expense and account credited interest payable.

3. Deferred revenue - Cash received in advance for the service to be rendered in future, earned revenue will be recognized at the end of accounting period. Example: Unearned revenue earned. Account debited unearned revenue and account credited earned revenue.

4. Deferred expense - Cash paid in advance for the future expense, incurred expense will be recognized at the end of accounting period. Example: Expiry of prepaid rent. Account debited rent expense and account credited prepaid rent.