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Identify the four different categories of adjusting entries frequently required at the end of an accounting period.
Accounting
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Accounting
Identify the four different categories of adjusting entries frequently required at the end of an accounting period.
Adjusting entries:
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).
Types of adjusting entries:
There are two types of adjusting entries, they are:
- Accruals and,
- Deferrals.
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.
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.
To identify: The four different categories which require adjusting entries at the end of the period, frequently.
Explanation of Solution
- 1. Prepaid expenses:Â The prepaid expenses are those expenses which are paid in advance, before they are incurred. These are treated as asset for the business.
- 2. Unearned revenue:Â Unearned revenue is the revenue which is earned in advance, ahead of goods supplied or services performed. As per the revenue recognition principle it is not recorded in the books of accounts until earned. Hence, this is considered as a liability for the business...
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