(1) prepaid expenses, (2) unearned revenues, (3) accrued expenses, and a (4) acc
ID: 2375139 • Letter: #
Question
(1) prepaid expenses, (2) unearned revenues, (3) accrued expenses, and a (4) accrued revenues. Select one specific adjusting entry that falls under one of the four types and post the following:
1. A description of the adjustment and why it is necessary. Provide an example of the transaction, include the debit and credit, with dates and amounts. Discuss the status of the accounts affected prior to the adjustment (understated or overstated), and explain the impact of the adjustment on the financial statements.
Explanation / Answer
Before end-of-period financial reports are prepared, adjustments to prepaid and accrued accounts are made. This process helps provide a true indication of where the company stands financially and it matches income and expenses to the period they effect. There are several types of accounts that require adjustments:
Prepaid Expenses - items or services that are paid for up-front. They are classified as assets when purchased.
Unearned Revenues - revenues received before they are earned. They are classified as liabilities when cash is received.
Accrued Revenues - revenues that have been earned but cash has not yet been received and no transaction has been recorded.
Accrued Expenses - expenses that have been incurred but not paid for yet and no transaction has been recorded.
Each of these adjustment types is described below along with examples and sample journal entries.
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