Adjusting Entries for Accruals

Adjusting Entries for Accruals - Adjusting Entries for...

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Adjusting Entries for Accruals The second category of adjusting entries is accruals . Prior to an accrual adjustment, the revenue account (and the related asset account) or the expense account (and the related liability account) are understated. Thus, the adjusting entry for accruals will increase both a balance sheet and an income statement account . Accrued Revenues Revenues earned but not yet recorded at the statement date are accrued revenues . Accrued revenues may accumulate (accrue) with the passing of time, as in the case of interest revenue. These are unrecorded because the earning of interest does not involve daily transactions. Companies do not record interest revenue on a daily basis because it is often impractical to do so. Accrued revenues also may result from services that have been performed but not yet billed nor collected, as in the case of commissions and fees. These may be unrecorded because only a portion of the total service has been provided and the clients won't be billed until the service has been completed. An adjusting entry records the receivable that exists at the balance sheet date and the revenue earned during the period. Prior to adjustment both assets and revenues are understated. As shown in Illustration 4-14 , an adjusting entry for accrued revenues results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account .
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Illustration 4-14 Adjusting entries for accrued revenues Helpful Hint For accruals, there may have been no prior entry, and the accounts requiring adjustment may both have zero balances prior to adjustment. Ethics Note Computer Associates International was accused of backdating sales—that is, saying that a sale that occurred at the beginning of one quarter occurred at the end of the previous quarter, in order to achieve the previous quarter's sales targets. In October Sierra Corporation earned $200 for advertising services that were not billed to clients on or before October 31. Because these services are not billed, they are not recorded. The accrual of unrecorded service revenue increases an asset account, Accounts Receivable. It also increases stockholders' equity by increasing a revenue account, Service Revenue. The accrual of unrecorded service revenue affects the accounting equation in the following way.
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Thus, Sierra makes the following adjusting entry. Accounts Receivable
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Adjusting Entries for Accruals - Adjusting Entries for...

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