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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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Type of adjustment

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense:

  1. a. Cash received for services not yet rendered.
  2. b. Insurance paid for the next year.
  3. c. Interest revenue earned but not received.
  4. d. Salaries owed but not yet paid.

To determine

Deferrals:

Deferrals refer to the revenues that are collected in advance before the services are provided or sales are made to the customer, and the expenses are paid in advance before the expenses are incurred.

Deferrals are classified into two types.  They are prepaid expenses, and unearned revenues.

Prepaid expenses:  The expenses are paid in cash, before they are incurred.

Unearned revenue:  The cash is received, before the services are performed.

Accruals:

Accruals refer to the revenues that are generated from goods delivered or, service performed to the customer, but cash is not yet received from the customer, and the expenses are incurred, but cash is not yet paid.

Accruals are classified into two types.  They are accrued revenues, and accrued expenses.

Accrued revenues: Revenues are generated but not yet received in cash.

Accrued expenses: Expenses are incurred but not yet paid in cash.

To indicate: The type of adjustment in the given transactions.

Explanation

a. Cash received for services not yet rendered

In this case, the cash is received before the services are performed to the customer, hence it is unearned revenue (deferrals).

b. Insurance paid for the next year

In this case, the insurance expenses paid in advance before the expenses are incurred hence, it is prepaid expense (deferrals)...

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