Analysis of Adjusting Entries: Accrued and Deferred Revenue Examples

This homework assignment provides a comprehensive overview of adjusting entries in accounting. It explains the purpose of adjusting entries, which are crucial for aligning revenues and expenses within the correct accounting cycle, adhering to the matching concept. The assignment focuses on two key types of adjusting entries: accrued revenue and deferred revenue. Accrued revenue is explained with an example of interest on a loan, detailing how to record it when services are delivered but not yet billed, ensuring accurate representation of sales and receivables. Deferred revenue is also discussed, outlining how payments received before services are rendered are recorded as liabilities until earned. An example is provided, illustrating how to recognize revenue over time as services are performed. The importance of adjusting entries in preparing accurate financial statements is emphasized, ensuring that financial reports reflect the accrual accounting method correctly. References to relevant sources are included.

ADJUSTING ENTRIES
Adjusting entries, also known as modifying journal entries, are journal entries given at the
end of a cycle to rectify reports prior to preparation of the annual reports. That is the fourth
step in the process of accounting. Modifying inputs are most widely used to align income and
expenditures in the cycle in which they arise, in keeping with the matching concept
("Adjusting Entries - Guide to Making Adjusting Journal Entries, Examples", 2020).
In order to record an adjusting entry there must be two or more accounts involved out of
which one should be from balance sheet account whereas the other one has to be from the
income statement account.
Adjusting entries are broadly classified into five groups namely, accrued revenues, accrued
expenses, and deferred revenues, deferred expenses and depreciation expense. In this work,
one example of accrued revenue and one example of deferred revenue is given.
Talking about accrued revenues first, under the accrual accounting method, an organization is
to record all of the profits (and associated receivables) it received through an accounting
cycle. A company may have paid commissions by delivering services to customers, but the
company records still do not include the profits or receivables. In that scenario, an accrual-
type adjustment entry must be done so that the sales and associated receivables are reflected
by the financial reports ("Accrued Revenue in Balance Sheet | Top Examples and Journal
Entry", 2020). Example can be interest on loan.
If an entity receives $4,000 in sales, but is not reported at the close of the reporting cycle, the
accrual-type adjustment entry is given below:
Accrued Receivables A/c Dr. 4,000
To, Service Revenues A/c 4,000
If accrued revenue is not recorded, sales and profits would be lumpy, giving the company a
misleading idea of its actual worth. This covers things which do not show at the close of the
cycle in the general ledger. The other party must report an accrued expense for the

specific exchange when an entity reports accrued service income, and is a liability on the
balance sheet. Because such sales are still not in the general ledger of the firm, they will not
show on the financial reports of the firm unless a changing entry is reported prior to the filing
of the accounts (Averkamp, 2020).
Now, coming to deferred revenues using the accrual accounting rules, the sums obtained
prior to earnings must be deferred to a liability account until they are acquired. Suppose a
company is to give service of $ 2,500 but has only earned $ 2,000 by the end of accounting
period then the remaining $ 500 is deferred to next accounting period. Only $ 2,000 is shown
as income in the present cycle.
Accrued Revenues, Deferred Revenues, or deposit made by client may be the term of the
general ledger obligation category. As the deferred sum is paid, it should be transferred to an
income statement account (such as sales revenues, operation revenues, charges received, etc.)
from unearned earnings. Unearned revenue is viewed on a corporation's balance sheet as a
short or long term (or both) liability, given the quality of the transaction and the
corresponding agreement. The entry would change this form of modification as and when the
income is received to identify revenue and mitigate deferred revenue. Any prepayment
received is deferred revenue.
To conclude a firm's statements and represent the accrual system, changing entries have to be
reviewed before releasing the financial statements.

REFERENCES
Accrued Revenue in Balance Sheet | Top Examples and Journal Entry. (2020). Retrieved 23
January 2020, from https://www.wallstreetmojo.com/accrued-revenue/
Adjusting Entries - Guide to Making Adjusting Journal Entries, Examples. (2020). Retrieved
23 January 2020, from
https://corporatefinanceinstitute.com/resources/knowledge/accounting/adjusting-
entries/
Averkamp, H. (2020). What is deferred revenue? | AccountingCoach. Retrieved 23 January
2020, from https://www.accountingcoach.com/blog/deferred-revenue