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 are both 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 Credit Adjustment Debit Adjustment 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 Credit Adjustment Debit Adjustment 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. 16 th, BAT Entertainment agrees to provide consulting services for a one month/30 day period (Oct. 16 th to Nov. 15 th ) for a fixed price of $5,500. On Oct. 31 st, 15 days of service has been provided and must be recorded: Accounts Receivable2750 Consulting Revenue2750

e.g. Accrued Salaries Expense BAT 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. 12 th & 26 th wages are paid and recorded): Oct. 12 th Salaries Exp.1000 Cash1000 Oct. 26 th Salaries Exp.1000 Cash1000 There are three working days after Oct. 26 th 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 rentXX Cash XX Adjustment: Rent Expense XX Prepaid rentXX

Amortization For Capital Assets (e.g. furniture) Original entry: FurnitureXX CashXX Adjustment: Amortiz. Exp., furnitureXX 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 XX Unearned Rev.XX Adjustment: Unearned Rev.XX RevenueXX

Accrued Expenses Part of expenses – recorded on the I/S Incurred but not paid and unrecorded (e.g. salary expense) Adjustment: Salary Exp.XX Salaries PayableXX Entry when expense is paid: Salary Exp. XX CashXX

Accrued Revenues Part of revenues – recorded in the I/S Revenue earned but not paid and unrecorded Adjustment: A/RXX RevenueXX Entry when paid: Cash XX A/RXX