By : Sara AlSager

Adjustment Types

Revenues

Expenses

Deferrals

AccrualsDeferral

sAccruals

Revenues

Deferrals:refers to receipts in one accounting period, but they will be earned in future accounting periods. For example, the insurance company has a cash receipt in December for a six-month insurance premium. However, the insurance company will report this as part of its revenues in January through June.

Accruals:refers to the reporting of revenues and the related receivables in the period in which they are earned, and that period is prior to the period of the cash receipt. For example, the interest earned in December on an investment in a government bond, but the interest will not be received until January.

Revenues

EXAMPLE (DEFERRED REVENUES)

When a company receives revenues in advance, it has an obligation to deliver goods or perform services. These unearned revenues are shown in a liability account. As a company delivers part of the goods or

performs part of the services, it earns a part of the advance receipts.

The earned portion must be transferred from the liability account to a revenue account.

EXAMPLE(ACCRUED REVENUES)

Accrued revenues are revenues that a company has earned by performing a service or delivering goods but for which no entry has been made in the accounting records. Any revenues earned but not recorded

during an accounting period require an adjusting entry that debits an asset account and credits a revenue account.

Expenses

Deferrals:refers to a payment that was made in one period, but will be reported as an expense in a later period. An example is the payment in December for the six-month insurance premium that will be reported as an expense in the months of January through June.

Accruals:refers to the reporting of an expense and the related liability in the period in which they occur, and that period is prior to the period in which the payment is made. An example is the electricity that is used in December, but the payment will not be made until January.

Expenses

EXAMPLE (DEFERRED EXPENSES)

Companies often make expenditures that benefit more than one period. These costs are debited to an asset

account. At the end of the accounting period, the

amount of the asset that has been used is transferred from the asset account to an expense account.

Prepaid expenses are costs that companies pay in advance, such as rent, supplies, and insurance.

EXAMPLE(ACCRUED EXPENSES)

At the end of an accounting period, some expenses incurred during the period have not been recorded. These expenses require adjusting entries. Examples include: Interest on borrowed money Wages Utilities

These expenses are called accrued expenses because, as the expense and the corresponding liability accumulate, they are said to accrue.

EXERCISE

A business has earned $5,000 of revenues, but they are not recorded as of the end of the accounting period.

Accrued Revenues

TYPES OF ADJUSTING ENTRIES

EXERCISE   On December 31, 2011, Krug Company

reported pretax income of $120,000 prior to the following adjusting entries:

Depreciation expense was $31,000; Accrued service revenues totaled

$29,000; Accrued expenses totaled $12,000; Expired insurance which was prepaid

totaled $9,000; Rent revenue earned was $7,000; the

rent was prepaid by the tenant and credited to unearned rent revenue.

How much is Krug's pretax income after adjusting entries?   

THE ANSWER Income of $120,000

- - Depreciation expense $31,000

++Accrued revenues $29,000

--Accrued expenses $12,000

--prepaid insurance $9,000

++Rent revenue earned $7,000

= = 104,000

Income after adjusting entries = 104,000