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chapter 3 Tips Prepaid Expenses and Unearned Revenues PG 20

chapter 3 Tips Prepaid Expenses and Unearned Revenues PG 20...

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Illustration 3-4 (continued) When a company receives cash from a customer in advance of earning the related revenue, the bookkeeper may record the receipt in one of two ways. Either as an unearned revenue (liability) or as an earned revenue. The first way is used most often in introductory accounting textbooks; the second is used most often in the real world. Regardless of the way the receipt is recorded, an appropriate adjusting entry will be made at the end of the accounting period so that correct balances appear on the income statement and the balance sheet. For example, $1,200 is received on May 1, 2007, for a twelve-month magazine subscription covering the time between May 1, 2007 and April 30, 2008. (Assume a calendar year reporting period.) A comparison of the two possible approaches appears below: Unearned Revenue (Cash Unearned Revenue (Cash Received) Received) Initially Credited to
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Unformatted text preview: OR Initially Credited to Liability Account Revenue Account 5/1 Cash 1,200 5/1 Cash 1,200 Unearned Sub. Rev. 1,200 Subscription Revenue 1,200 12/31 Unearned Sub. Rev. 800 12/31 Subscription Revenue 400 Subscrip tion Revenue 800 Unearned Sub Rev. 400 After posting the entries, the accounts appear as follows: Unearned Subscription Revenue 12/31 Adj. 800 5/1 1,200 12/31 Sal. 400 Unearned Subscription Revenue 12/31 Adj. 400 Subscription Revenue 12/31Adj. 800 Subscription Revenue 12/31 Adj. 400 5/1 1,200 12/31/ 800 Bal. Notice that the balances in the accounts are the same regardless of the approach used; that is, Unearned Subscription Revenue is $400, and Subscription Revenue is $800 at December 31, 2007. **TIP: The adjusting entry illustrated in the left column would not be subject to reversal; a reversing entry can be used with the approach illustrated in the right column....
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