CHAPTER 4 – ADJUSTMENTS, FINANCIAL STATEMENTS, AND THE
QUALITY OF EARNINGS
VAN HOUTTE, INC.
Any contra account is directly related to another account but has a balance on the
opposite side of the T-account.
Recognizing Revenues in the Proper Period
When cash is received PRIOR to earning a revenue by delivering goods/performing a
service, the company records a journal entry.
Unearned revenue is considered a deferred revenue account.
Accrued revenues: When revenues are earned but not yet recorded at the end of the
accounting period because cash changes hands AFTER the service is performed/goods
Recognizing Expenses in the Proper Period
Deferred expenses: When cash is paid prior to incurring an expense. Company debits
asset account and credits Cash.
Accrued expenses: Expenses that are incurred in the current period but not paid for until
the next. A/P.
When calculating adjusting entries…
1. Identify whether the adjustment is to an existing deferred revenue or expense
or an unrecorded accrued revenue or expense. Ask yourself “Was cash
already received or paid prior to the end of the period, or will cash be received
or paid in the future?”. If a deferred account is to be adjusted, write the