ACCOUNTING BASICS LESSON FIVE- PART TWO THE ADJUSTMENT PROCESS ADJUSTING ENTRIES/DEFERREL ADJUSTMENTS
If we take a deposit for revenue to be earned in the future we have collected deferred revenue. Deferred revenue is a liability account because now we owe our customer. If we pay an expense in advance before we have used the service or consumed the product we have paid a deferred expense. Deferred expenses are classified as assets until we use them up. Both of these types of accounts need to be adjusted at the end of the accounting period due to a basic accounting concept called the matching concept.
Two rules concerning deferrel adjustments: 1. Do not involve cash 2. Always use either a revenue or expense account
Two Types of Deferral Adjustments To adjust may need to consider the current balance
1. Deferred Expense - Have been paid but not yet used or consumed. Debit – An expense account (expense account type) Credit – A prepaid account or supplies (liability account type)
To adjust may need to consider the current balance
2. Deferred Revenue – Money has been received but not earned yet Debit – An unearned revenue account (liability account type) Credit – A revenue account (revenue account type)
ACCOUNTING BASICS LESSON FIVE PART TWO THE ADJUSTMENT PROCESS ADJUSTING ENTRIES/DEFERREL ADJUSTMENTS PROBLEMS TO WORK 1) The balance in the unearned fees account before adjustment at the end of the year is $32,000.
After a careful review we realize that the balance should be $21,000. What amount is needed to adjust the account to reflect the $21,000 current balance in unearned fees?
What type of adjustment is this? Is it a deferred revenue adjustment or a deferred expense adjustment?
What account do we debit? What account do we credit? 2) The prepaid insurance account had a balance of $19,000 at the beginning of the year. The account was increased $6,000 for premiums on policies purchased during the year. Determine the adjustment required at the end of the year for each of the following independent situations. a) The amount of unexpired insurance premiums applicable to a future period is $8,000. What amount is needed to adjust the account to reflect the current balance in prepaid insurance?
What type of adjustment is this? Is it a deferred revenue adjustment or a deferred expense adjustment?
What account do we debit? What account do we credit?
b) If the amount of insurance expired during the year is $17,000, how would this change the amount of the adjustment needed to reflect the current balance in unearned fees?
Accounting Basics: Lesson 5, Part Two - Handout.pdf
Page 1 of 2. ACCOUNTING BASICS LESSON FIVE- PART TWO. THE ADJUSTMENT PROCESS. ADJUSTING ENTRIES/DEFERREL ADJUSTMENTS. If we take a deposit for revenue to be earned in the future we have collected deferred revenue. Deferred revenue is a liability account because now we owe our customer.
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