Chapter 4 - Adjustments Flashcards
Accrued Revenue
When companies perform services or provide goods (earn revenue) before customers pay, and customer has not yet been billed, this revenue is recorded as accrued revenue.
Deferred Revenue
When a customer pays for goods or services before the company delivers them, the company records the amount of cash recv’d as deferred revenue
Deferred Expenses
Assets that are used over time to generate revenue.
Another explanation:
Deferred expenses previously acquired assets need to be adjusted at the of the accounting period to reflect the amount of expense incurred in using the assets to generate revenue
Accrued Expenses
Expenses that are incurred in the current period without being paid for until the next period
Examples of deferred revenues
Unearned revenue: Gift cards sold by chipotle that haven’t been redeemed yet
Examples of accrued revenue
Interest on investments
What are the three steps to analyze an adjustment at the end of a period?
- Ask: was revenue earned or an expense incurred that is not yet recorded?
- Ask: was the related cash received or paid in the past or will it be received or paid in the future?
- Compute the amount of revenue earned or expense incurred.
When analyzing an adjustment, what do you do if you determine that revenue has been earned or expense incurred that has not yet been recorded?
Credit the revenue account or debit the expense account in the adjusting entry
When adjusting, what do you do if you determine that unrecorded revenue exists for which cash was received in the past?
If cash was received, a deferred revenue (liability) account was recorded in the past. Now that revenue has been earned, reduce the liability account that was recorded when cash was received (usually Unearned Revenue account)
Deferred Revenue
Is cash ever included in an adjusting entry?
No, because it was recorded already in the past or will be recorded in the future.
What do you do if you determine that unrecorded revenue has been generated for which cash will be received in the future?
Increase the receivable account (I.e. interest receivable or rent receivable).
Created Accrued Revenue
What do you do if you find that cash was paid in the past for an expense that has not yet been recorded?
If cash was paid in the past, a deferred expense account was already created. Now reduce the asset account that was recorded in the past (such as supplies or prepaid expense).
Deferred Expense.
What do you do if you find unrecorded expenses incurred for which cash will be paid in the future?
Increase the payable account (such as interest payable or wages payable) to record what is owed by the company to others.
Creates accrued expense.
Examples of deferred expenses
Supplies, buildings (depreciation). Equipment (depreciation), prepaid insurance, prepaid rent, prepaid advertising.
Order in which financial statements must be prepared
(1a. Trial Balance)
1. Income Statement
2. Statement of Stockholders Equity
3. Balance Sheet
