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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjusting entry for accrued fees

At the end of the current year, $22,650 of fees have been earned but have not been billed to clients.

a. Journalize the adjusting entry to record the accrued fees.

b. If the cash basis rather than the accrual basis had been used, would an adjusting entry have been necessary? Explain.

(a)

To determine

Accrued Revenue

Accrued revenue refers to the revenue those are earned but not yet received in a particular accounting period. They are receivable for the business. Business treat accrued revenue as an asset.

Adjusting Entries

Adjusting entries indicates those entries which are passed in the books of accounts at the end of one accounting period. These entries are passed in the books of accounts as per the revenue recognition principle and the expenses recognition principle to adjust the revenue, and the expenses of a business in the period of their occurrence.

Rule of Debit and Credit:

Debit - Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.

Credit - Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.

To record: The adjusting entry for the accrued fees.

Explanation

The adjusting entry for the accrued fees is as follows:

Date

Account Titles and Explanation Debit ($) Credit ($)
December 31 Account Receivable 22,650
       Service revenue22,650
(To record the fees earned but not yet received)

Table (1)

Following is the impact of the adjusting entry in the accounting equation...

(b)

To determine

Cash basis of accounting

Cash basis of accounting is an accounting method in which all receipts and payments of the business are recorded in that accounting period in which the cash is actually received or paid.

To explain: The necessity of the adjusting entry, if cash basis accounting is followed instead of accrual basis accounting.

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