F1 - M8 - Adjusting Journal Entries Flashcards
What is the accrual basis of accounting?
To match revenues and expenses in the proper periods
What is deferred revenue?
When cash is received before the revenue is earned
Ex: magazine subscriptions
What is deferred expense (prepaid)?
When cash is paid before the expense is incurred
Ex: prepaid rent
What are accrued revenues?
When cash is received after the revenue has been earned
Ex: sale on credit (AR) and cash is received in a different period
What are accrued expenses?
When cash is paid after the expense has been incurred
Ex: Utilities are incurred but are not paid until the following month
What is the journal entry to record deferred revenue?
DR: Cash
CR: Deferred Revenue (Liability)
What is the adjusting journal entry to release deferred revenue?
DR: Deferred Revenue (Liability)
CR: Revenue
What is the journal entry to record deferred expense?
DR: Prepaid Expense (Asset)
CR: Cash
What is the adjusting journal entry to release deferred expense?
DR: Expense
CR: Prepaid Expense
What is the journal entry to record accrued revenues?
DR: Accounts Receivable
CR: Revenue
What is the journal entry to record accrued liabilities?
DR: Expense
CR: Accrued Liability
Rules for adjusting journal entries due to error
1) Must be recorded by the end of the entity’s fiscal year
2) NEVER involve the cash account
3) All entries hit one income statement account and one balance sheet account
