Accounting for Deferrals
3.2.8 Analysis of earned revenue recognition transaction
8) All the services were finally performed in the current period, thus the company should recognize the remainder of unearned revenues from 20X7. From the initial unearned revenue amount of $3,000 received in 20X7, $1,500 was recorded as revenue at the end of 20X7. The other part of unearned revenue ($1,500) must be recognized in 20X8 for the 6 months of services. This is a claim exchange transaction because liabilities (Unearned Revenue) decrease and equity (Revenue) increases:
Illustration 3-18: Effect of earned revenue adjusting entry
|
Liabilities |
... |
Equity |
|
Unearned Revenue |
... |
Revenue |
Beginning Balances |
$1,500 |
|
$5,000 |
8) Revenue Recognition |
(1,500) |
|
+1,500 |
Ending Balances |
0 |
|
6,500 |
3.2.9 Analysis of car depreciation expense transaction
9) Recognition of depreciation expense on the car for 20X8 is an asset use transaction. Assets and equity decrease:
Illustration 3-19: Effect of recognizing depreciation expense
|
Assets |
... |
Equity |
|
Accumulated Depreciation |
... |
Depreciation Expense |
Beginning Balances |
($700) |
|
$ 0 |
| 9) Depreciation Expense |
(700) |
|
(700) |
Ending Balances |
(1,400) |
|
(700) |
3.2.10 Analysis of supplies expense transaction
10) Recognizing supplies as an expense is deferred until supplies are used in the process of generating revenue. It is a normal practice that the entire amount of supplies used during one accounting period is transferred to an expense account in a single year-end adjusting entry. The amount of supplies used during an accounting period is calculated by subtracting the ending balance (remaining on hand at the period end) from the beginning balance and purchases during the period. In our example, the beginning balance (supplies purchase) is $500, and the ending balance is $200. Based on this information, $300 ($500 - $200) must have been used during 20X8 accounting period. When making the year-end adjusting entry, we remove $300 of supplies from the Supplies account and put it in the Supplies Expense account:
Illustration 3-20: Effect of recognizing supplies expense
|
Assets |
... |
Equity |
|
Supplies |
... |
Supplies Expense |
Beginning Balances |
$500 |
|
$ 0 |
10) Supplies Expense |
(300) |
|
(300) |
Ending Balances |
200 |
|
(300) |
3.2.11 Analysis of insurance expense transaction
11) Generally, the entire original amount of the insurance policy is placed in the Prepaid Insurance account. Later, when time passes and part of insurance is used, an adjustment is made. An appropriate amount of insurance is transferred from the Prepaid Insurance account to the Insurance Expense account, i.e., expense recognition takes place. Prepaid insurance is an example of a prepaid expense.
Prepaid expenses are expenses paid in cash and recorded as assets before they are used or consumed. Prepaid expenses are usually shown in the assets section on the balance sheet.
Page 8 of 10
Location