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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Explain why companies sometimes recognize accruals for accrued expenses and accrued revenues. Give an example of an adjusting entry to record each of these items.

To determine

Explain the reason why the companies sometime recognize accruals for accrued expense, and accrual revenues, and give an example of an adjusting entry to record each of these items.

Explanation

Accrual accounting: The method of accounting which recognizes revenues before they are received, and recognizes expenses before they are paid, is referred to as accrual accounting.

Explain the reason why the companies sometime recognize accruals for accrued expense, and accrual revenues, and give an example of an adjusting entry to record each of these items as follows:

Accrual expense:

Accrual expense is an expense that is incurred during the accounting year but neither paid nor recorded.

Example:

Assume a company pays salaries to employee once a month on the 15th of the each month. The monthly salary payment is $6,000. On December 31, the following adjusting entry is necessary,

DateAccount Title & ExplanationDebit ($)Credit($)
December 31Salaries expense ($6,000×12)3,000 
 Salaries payable 3,000
 (To record the salaries expense accrued at the end of the accounting year)

Table (1)

Accrual revenue:

Accrual revenue is revenue that is recognized during the accounting year but neither received nor recorded.

Example:

Assume a company has purchased $6,600 notes at 12% interest on November 1

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