Module 6 Homework Use complete sentences. Show and label all work to receive any

Question

Module 6 Homework Use complete sentences. Show and label all work to receive any credit for the homework. 1. Terminology and Concepts-Adjusting Entries: a. If utility expense accrues as incurred, why do we wait until we get the bill to record it? c. What is being deferred in a deferral adjusting entry? Provide a real life example for an d. What is being accrued in an accrual adjusting entry? Provide a real life example for an e. Which financial statements would be affected if revenue earned, but not yet received b. What are adjusting entries adjusting? expense deferral and a revenue deferral that you have personally encountered. was not included in the books for the period? How would they be affected? Who t. Should a firm record in the accounting records interest expense incurred but not yet g. Should the firm record in the accounting records the use of supplies that have already expense accrual and a revenue accrual that you have personally encountered would care if the entry were not made? paid? Why? acquired)? Why? been paid for (the supplies were included in the supplies account when they were

Explanation / Answer

Answer:

1a. The amount to be accrued needs a basis/document (accounting record based on which the entry is recorded). The receipt of bill also provides the exact amount to be accrued.

1b. The adjusting adjusts either expense or revenue.

1c. Either revenue or expense is deferred in a deferral adjusting entry.

Example of expense deferral: If insurance premium is paid for say, two years in the beginning of current financial year for insurance effective 1st January, current year. Then at year end, Insurance premium expense for the unexpired duration (for the next year) has to be deferred as 'Prepaid Insurance'.

Example of revenue deferral: In a typical business of subscription revenue, say, a company receives subscription revenue for a period beyond current year. In this case, the advance revenue received for future period has to be deferred and recorded as 'Deferred Revenue'.

1d. In a accrual adjusting entry either revenue is accrued or expense is accrued. We may receive utility bills for current month, in the next month. As the utility expense relates to current period, an adjustment entry has to be recorded for the same at the closure of current period. They represent obligations to make payments which are not due.

In case of a service company, the service billing cycle may not match with accounting period. In such case, adjustment entry for accrued revenue has to be recorded for value of services rendered till the end of accounting period which are not yet billed but rendered and earned.

1e. If revenue earned, but not yet received, is not included in the books of accounts as accrued revenue, then both Income statement and Balance sheet would be affected. It would understate 'revenue' and hence, 'income' in Income Statement and understate 'retained earnings' in Balance sheet. The stakeholders who would care are Owners/Shareholders, Auditors, concerned managers (whose sales commission depends on revenues).

1f. Yes, a firm should record in the accounting records interest expense incurred but not yet paid. They represent obligations to make payments but are not due Although not paid, this expense relates to current period and as per accrual concept and matching concept this has to be accrued and recorded.

1g.

As the supplies were included in the supplies account (an asset account) when they were acquired, the firm is following consumption method of accounting for supplies. Yes, the firm should record in the accounting records the use of supplies. The use of supplies has to be charged as expense to Income of the current year as the expense relates to current year. Initial recording of purchase (for supplies paid) is recorded as Supplies account which is an asset account. Any consumpiton of supplies has to be charged as expense in the period crediting asset account.

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