RECAP

Accrued Revenue– earned but not recorded nor cash received

Accrued Expense – costs incurred but unpaid and unrecorded

Unearned Revenue – cash received in advance for products or services

Prepaid Expense –payment made in advance of receiving benefits

Costs incurred in a period that areboth unpaid and unrecorded.

Adjusting for Accrued Expenses

I’ve used the phone all month, but I won’t get

the bill until next month

Accounts Payable Expense

CreditAdjustment

DebitAdjustment

Adjusting Accrued Expenses

Even though the phone bill will not be received until next month, the company has incurred the expense this month. In order to match the expense against revenues generated, we must accrue it into the current period. This adjusting

entry records the cost as an expense and sets up the amount owing as a liability.

I’ve almost completed your tax return. You can pay me once the work is

completed.

Revenues earned in a period that are both unrecorded and not yet received.

Adjusting for Accrued Revenues

Account Receivable Revenue

CreditAdjustment

DebitAdjustment

Adjusting Accrued Revenue

Even though the tax return is not fully completed, we need to recognize the revenue earned on the portion of the services that

have been completed. This adjusting entry recognizes that revenue has been earned and sets up an asset account to show that the customer owes the company for the services provided.

e.g. Accrued Consulting Revenue

On Oct. 16th, BAT Entertainment agrees to provide consulting services for a one month/30 day period (Oct. 16th to Nov. 15th) for a fixed price of $5,500. On Oct. 31st, 15 days of service has been provided and must be recorded:

Accounts Receivable 2750

Consulting Revenue2750

e.g. Accrued Salaries ExpenseBAT Entertainment needed to hire an additional employee to help with

the busy first month. The employee earns $100 a day or $500 for a 5-day work week. (Mon. to Fri.) The employee gets paid every two weeks on Friday (Oct. 12th & 26th wages are paid and recorded):

Oct. 12th

Salaries Exp. 1000Cash 1000

Oct. 26th

Salaries Exp. 1000Cash 1000

There are three working days after Oct. 26th that the employee earned their salary but it is not yet paid or recorded. The adjustment is:Salaries Exp. 300

Salaries Payable 300

Types of Adjustments - Summarized

Amortization - As a capital asset wears out over time, an expense is recorded to match the cost of the asset over the periods benefited. This adjusting entry uses a contra account called Accumulated Amortization. This account would be subtracted from the capital asset account to which it related on the balance sheet.

Prepaid expenses - As time goes by, a prepaid asset will be consumed or will expire and its cost will become an expense. This adjusting entry records the amount of the prepaid asset that has been consumed or that has expired as an expense and reduces the prepaid asset account accordingly.

Unearned revenue - is a liability account because the company has an obligation to supply future services. As these services are provided, an unearned revenue will become an earned revenue. This adjusting entry records the amount of unearned revenue that later becomes earned.

Types of Adjustments - Summarized

Accrued expenses - Even though the phone bill will not be received until next month, the company has incurred the expense this month. In order to match the expense against revenues generated, we must accrue it into the current period. This adjusting entry records the cost as an expense and sets up the amount owing as a liability.

Accrued Revenue - Even though the tax return is not fully completed, we need to recognize the revenue earned on the portion of the services that have been completed. This adjusting entry recognizes that revenue has been earned and sets up an asset account to show that the customer owes the company for the services provided.

Prepaid Expenses

Prepaid expenses (e.g. rent)Original entry:

Prepaid rent XXCash XX

Adjustment:

Rent Expense XX

Prepaid rent XX

Amortization

For Capital Assets (e.g. furniture)Original entry:

Furniture XXCash XX

Adjustment:

Amortiz. Exp., furniture XX

Accum. Amortiz., furn. XX

Unearned Revenue• Aka: deferred revenue – unearned rev. is

a liability account – we have been paid but still owe the services

Original entry:

Cash XXUnearned Rev. XX

Adjustment:

Unearned Rev. XX

Revenue XX

Accrued ExpensesPart of expenses – recorded on the I/SIncurred but not paid and unrecorded (e.g. salary

expense)Adjustment:

Salary Exp. XXSalaries Payable XX

Entry when expense is paid:

Salary Exp. XXCash XX

Accrued RevenuesPart of revenues – recorded in the I/S

Revenue earned but not paid and unrecorded Adjustment:

A/R XX

Revenue XXEntry when paid:

Cash XX

A/R XX