Adjustment: Recognizing Unrecorded, Earned Revenues (Accrued Revenues)

Type 4 Adjustment: Recognizing Unrecorded, Earned Revenues (Accrued Revenues)

Accrued revenues are revenues that a company has earned by performing a ser- vice or delivering goods but for which no entry has been made in the account- ing records. Any revenues earned but not recorded during an accounting period require an adjusting entry that debits an asset account and credits a revenue account, as shown in Figure 3-6. For example, the interest on a note receivable

FIGURE 3-6

BALANCE SHEET

Adjustment for Unrecorded (Accrued) Revenues

Asset

Liability

1. Allocating recorded

2. Recognizing I

unrecorded N

Expense

costs between two

or more accounting

expenses. C

periods.

OM

3. Allocating recorded, S

4. Recognizing unrecorded, earned revenues.

unearned revenues T

A A SSET A CCOUNT

R EVENUE A CCOUNT

between two or more accounting periods.

E Revenue Adjusting

Adjusting

N Entry

Entry

The Adjustment Process

When a company earns revenue by performing a service—such as

designing a website or developing marketing plans—but will not receive the revenue for the service until a future accounting period, it must make an adjusting entry. This type of adjusting entry involves an asset account and a revenue account.

Courtesy of Sullivan/Fancy/Corbis.

is earned day by day but may not be received until another accounting period. Interest Receivable should be debited and Interest Income should be credited for the interest accrued at the end of the current period.

During July, Miller Design Studio, Inc. agreed to create two advertisements for Maggio’s Pizza Company. It also agreed that the first advertisement would be finished by July 31. By the end of the month, Miller had earned $400 for com- pleting the first advertisement. The client will not be billed until the entire project has been completed.

Adjustment for Design Revenue

July 31: Accrual of unrecorded revenue, $400 Analysis: Accrual of unrecorded revenue increases the stockholders’ equity

account Design Revenue with a credit and increases the asset account Accounts Receivable with a debit.

Application of Double Entry:

Assets

⫽ Liabilities ⫹

Stockholders’ Equity

A CCOUNTS R ECEIVABLE D ESIGN R EVENUE

July 15 9,600 July 22 5,000

July 10 2,800

31 400 15 9,600 Bal. 5,000 31 800

Bal. 13,600

CHAPTER 3 Measuring Business Income Comment: Design Revenue now reflects the total revenue earned during July,

$13,600. Some companies prefer to debit an account called Unbilled Accounts Receivable. Other companies simply flag the transactions in Accounts Receivable as “unbilled.” On the balance sheet, they are usually combined with accounts receivable.

Application to Netflix, Inc. Since Netflix ’s subscribers pay their subscrip- tions in advance by credit card, Netflix does not need to bill customers for ser-

vices provided but not paid. The company is in the enviable position of having no accounts receivable and thus a high degree of liquidity.

A Note About Journal Entries

Thus far, we have presented a full analysis of each journal entry and showed the thought process behind each entry. Because you should now be fully aware of the effects of transactions on the accounting equation and the rules of debit and credit, we present journal entries without full analysis in the rest of the book.