In this chapter, we are discussing adjusting entries that are important to the accrual basis of accounting. There are four main classifications of journal entries, and each serves its own purpose and has several examples.
Identify one specific type of journal entry and briefly provide answers to the following questions about the entry:
- What is the classification of the journal entry in question?
- What accounts get debited and credited to account for the transaction?
- How would the accounts be in error if the adjusting entry was not recorded at all?
- Most journal entries have a counterpart on the other side of the transaction. For example, if we are buying something from a supplier, it would be an expense to us, but revenue to the supplier. Considering this, what is the counterpart adjusting journal entry for the one that you have selected?
Your answers to all questions should be different from your classmates.
Your initial posting should be 250-500 words
REACTIONS:
- Build on something your classmate said
- Explain why and how you see things differently
- Ask a probing or clarifying question
- Share your understanding of your classmates posting
- Offer and support an opinion with peer-reviewed sources or industry leading practices
- Expand on your classmates posting by providing constructive feedback
Refer to the discussion grading rubric for more information on expectations of class discussions.
REACTION TO POST #1
Hi Class,
The four main classifications of journal entries in the accrual basis of accounting are deferral of expense, deferral of revenue, accrued expense, and accrued revenue. I will be discussing deferred revenue. I worked with a version deferred revenue quite a bit when I worked in a law office. The clients would provide a retainer of a specified amount (deferred revenue) and the attorneys office manager/accountant would take from the retainer monthly to cover the expenses incurred by the attorney for his/her time in court, preparation, mediation, etc.
For deferred revenue, the account that gets debited is the liability account and the account credited is the revenue account. This decreases liability and increases the revenue.
The accounts would be in error if the adjusting entry was not recorded at all because the unearned revenue, or deferred revenue, would still be sitting as a liability instead of adjusting for the amount earned by providing the services for the prepaid product or service. Revenues would not increase and the equity of the company would not be accurate if the adjusting journal entry is not made. For example:
A client gives $2,000 to a lawyer for services to be provided on 12/4/21.
Assets = Liabilities + Equity
+$2,000 = +$2,000
On 12/5/21 and 12/10/21 the lawyer provides 6 hours of service between the two days at $250 per hour ($1500 total).
Assets = Liabilities + Equity
-$1500 +$1500
There is still $500 in unearned (deferred) revenue in the liabilities account that will need to be accounted for with an adjusted entry in the next recording period.
The counterpart adjusting journal entry for deferred revenue would be decrease in assets for the person or company paying for the legal services if they paid cash. It would be an increase in liabilities if they paid the retainer on credit.
Reference
Wild, J. J. & Shaw, K.W. (2021). Fundamental accounting principles (25th ed.). McGraw Hill.
Kate
REACTION TO POST #2
Hello Class,
Of the four types of adjusting journal entries, I have elected to cover accrued expense, also known as accrued liabilities. This adjustment is necessary when there are unpaid and unrecorded expenses and liabilities during a given period. The accrued expense adjustment involves an increase in expense and liability accounts; specifically, a debit to expenses (an increase) and a corresponding credit to the appropriate liability account (also an increase). The expenses are reported on the income statement, and the liabilities on the balance sheet (Wild & Shaw, p. 94). (All adjusting entries will involve one income statement account and one balance sheet account.)
The accrued expense adjustment is, as the name implies, classified as an accrued, or accumulated, item. Accruals are used to bring forward and recognize items in the current period, whereas deferrals delay recognition to a later period. (“The Difference Between Accruals and Deferrals”, 2021).
Examples of accrued expenses are unpaid wages, accrued interest, accrued payroll tax, accrued utilities, accrued goods and services, and incurring a debt without receiving an invoice until a subsequent period.
If adjustments for accrued expense were not recorded, accounting records would over report net income and under report total liabilities.
Accrued expenses represent liabilities. The counterpart adjusting entry for accrued expense is accrued revenue. This represents revenue that has been earned but not yet paid. The revenue recognition principle says that revenue must be recorded in the period it is earned, and accrued revenue adjustments make this possible. Adjusting entries for accrued revenue are a debit to the appropriate asset account and a credit to the revenue account (Wild & Shaw, p. 94).
-Michael
References
The Difference Between Accruals and Deferrals. (2021, March 7.) AccountingTools. https://www.accountingtools.com/articles/2020/11/10/the-difference-between-accruals-and-deferrals#:~:text=The%20main%20difference%20between%20an,recognition%20until%20a%20later%20period.
Wild, J., Shaw, K. (2021) Fundamentals Accounting Principles 25th edition McGraw Hill
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