Accounting for Deferrals

3.2 Illustration #2 of accounting for deferrals

The following transactions pertain to the accounting period of 20X8. SuperDels:

Received additional contribution from the owner in amount of $3,000.
Paid $1,200 cash for an insurance policy with one-year term beginning April 1, 20X8.
Paid $500 for supplies.
Recognized $5,000 revenue on account for services provided.
Collected $4,000 from clients.
Paid $1,400 in cash for other operating expenses.
Sold land that was purchased in the previous period for $700.

Adjusting entries at the end of the accounting period:

To recognize unearned revenue remaining from 20X7. All services were fully provided by July 1, 20X8 (according to the contact).
To recognize depreciation expense on the car used.
To recognize the use of supplies. At the end of 20X8, $200 of supplies remained on hand.
To recognize insurance expense for 9 months in 20X8.

Below we provide the ending balances of accounts from the previous fiscal year (20X7). Recall that those ending balances become beginning balances for the current period (20X8):

Illustration 3-10: 20X8 beginning account balances

Cash	2,100
Car	4,000
Accumulated Depreciation	(700)
Land	1,000
Total Assets	6,400
Unearned Revenue	1,500
Contributed Capital	4,400
Retained Earnings	500
Total Liabilities & Equity	6,400

3.2.1 Analysis of capital contribution transaction

1) $3,000 capital contribution is an example of an asset source transaction. Cash and equity (Contributed Capital) increase by the like amount:

Illustration 3-11: Effect of capital contribution

	Assets	...	Equity
	Cash	...	Contributed Capital
Beginning Balances	$2,100		$4,400
1) Capital Contribution	+3,000		+3,000
Ending Balances	5,100		7,400

3.2.2 Analysis of insurance purchase transaction

2) The purchase of the insurance policy results in a deferral. As the insurance is paid in advance, an account named Prepaid Insurance is used to record the acquisition.

Prepaid insurance is used to keep track of cash paid for insurance coverage that has not been expensed. Prepaid insurance is an asset account and presented in the assets section on the balance sheet.

Prepaid insurance account has not been used before, thus, it has a zero beginning balance. The transaction is an asset exchange one:

Illustration 3-12: Effect of insurance purchase

	Assets	...	Assets
	Cash	...	Prepaid Insurance
Beginning Balances	$5,100		$ 0
2) Insurance Purchase	(1,200)		+1,200
Ending Balances	3,900		1,200

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