Question

Classify the following items as: (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue.

Fees received but not yet earned: _______________________________

Fees earned but not yet received: _______________________________

Paid premium on a one-year insurance policy: _____________________

Sales tax owed to be paid beginning of next year: __________________

Answer 1

Unearned Revenue is the amount received in advance which is not yet earned. While preparing the journal entry, Cash will be debited because cash is coming into the business and Unearned Revenue account is credited because it is a liability as amount received without providing the service or selling the goods.

Therefore, Fees received but not yet earned is treated as Unearned Revenue

Accrued Revenue is the revenue already earned like goods have already sold but cash is not yet collected. While preparing the journal entry, Accounts Receivable is debited because cash need to be collected from the customers for the goods sold or services rendered on account and Revenue account is credited because revenue is recorded in the books on accrual basis.

Therefore, Fees earned but not yet received is treated as Accrued Revenue.

Prepaid Expenses are the prepayments of future expenses that will going to incur. For example, Rent for coming 12 months is paid on the current date then it is treated as current asset until the expire of rent for last period. While prepaying the rent in the current period, Prepaid Rent is Debited because it will be treated as current asset until the expire and Cash is credited because cash is going out.

Therefore, Paid premium on a one-year insurance policy is treated as Prepaid Expense.

Accrued Expense is the expense already incurred but not paid like Purchase of materials on account. Here, purchase of materials is an expense which is already incurred (purchased) but not yet paid. While preparing the journal entry, Materials is debited because they are coming into the business due to purchase and Accounts Payable is credited because they have not paid yet.

Therefore, Sales tax owed to be paid beginning of next year is treated as Accrued Expense.

Fees received but not yet earned: (2) Unearned Revenue

Fees earned but not yet received: (4) Accrued Revenue

Paid premium on a one-year insurance policy: (1) Prepaid Expense

Sales tax owed to be paid beginning of next year: (3) Accrued Expense