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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) revenue, or (4) accrued expense:

a. Cash received for use of land next month

b. Fees earned but not received

c. Rent expense owed but not yet paid

d. Supplies on hand

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 types of adjustment for the given transactions.

Explanation

a. Cash received for use of land next month

In this case, the cash is received before the land being rented hence it is unearned revenue (deferrals).

b. Fees earned but not received in cash

In this case, fees earned from member/client but not yet received in cash hence it is accrued revenue (accruals)...

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