4 Accrual Accounting and Adjusting Entries Free Online FlashCards

What is accrual-basis accounting?

Accrual accounting records transactions in the periods when the related economic activity occurs, regardless of when cash changes hands.

When does cash-basis accounting generally record revenue and expenses?

Cash-basis accounting generally records revenue when cash is received and expenses when cash is paid.

When is revenue recognized under accrual accounting?

Recognize revenue when it is earned, typically as the business satisfies its promise to provide goods or services.

When are expenses recognized under accrual accounting?

Recognize expenses when they are incurred, such as when resources are used or an obligation arises, rather than when payment is made.

What do period-end adjusting entries accomplish?

Adjusting entries update accounts so revenues and expenses appear in the appropriate period and balance-sheet accounts reflect what remains at period-end. They do not record a new cash receipt or payment.

What is a deferral in adjusting entries?

A deferral occurs when cash is received or paid before the related revenue is earned or expense is incurred.

What is an accrual in adjusting entries?

An accrual occurs when revenue is earned or an expense is incurred before cash is received or paid, and the transaction has not yet been recorded.

How does a prepaid expense change as its benefit is used?

A prepaid expense begins as an asset because it represents a future benefit already paid for. As the benefit is used, the used portion becomes an expense.

What is the January adjustment for a $1,200 six-month insurance prepayment?

One month of the six-month policy has expired, so the adjustment debits Insurance Expense for $200 and credits Prepaid Insurance for $200.

Why is cash received before providing a service recorded as a liability?

Unearned revenue is a liability because the business still owes the customer performance or, depending on the arrangement, a refund.

How is $900 of completed but unbilled work recorded?

Debit Accounts Receivable and credit Service Revenue for $900.

How is later customer payment for previously accrued revenue recorded?

Record Cash and reduce Accounts Receivable. Do not recognize the revenue again, because it was recorded when the work was completed.