Accrued Expenses
Adjusting entries are performed at the close of an accounting window to update account balances, ensuring total compliance with the accrual basis of accounting before statement distribution. Every adjustment alters at least one Income Statement line (Revenue/Expense) and one Balance Sheet line (Asset/Liability).
Concept: The entity consumes an operational value during the current month but will not pay cash or receive an official bill until the following period.
Adjustment Entry:
Accrued Revenues
Concept: A service has been fully performed for a client, but the transaction has not yet been billed or collected in cash.
Adjustment Entry:
Deferrals: Prepaid Expenses
When cash is paid in advance, it can be processed using two distinct bookkeeping methods:
Asset Method: The original payment is parked entirely inside an asset account (e.g., Prepaid Rent). At period-end, the used-up portion is extracted.
Expense Method: The original payment is immediately logged entirely inside an expense account (e.g., Rent Expense). At period-end, the unconsumed asset portion is calculated and extracted.
Deferrals: Unearned Revenues
When cash is collected from a client prior to performance, it can be recorded via:
Liability Method: Parked in a liability account (e.g., Unearned Rent). The adjusted entry extracts what has been earned.
Revenue Method: Logged immediately into a revenue account. The adjusted entry removes the unearned portion.
Fixed Asset Depreciation
Concept: The systematic allocation of a long-term fixed asset's historical cost over its estimated useful economic life. Land is never depreciated.
Contra-Asset Framework: The entry credits Accumulated Depreciation instead of the asset account directly, preserving the asset's original historical purchase cost on the Balance Sheet.
Straight-Line Equation: