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Chapter 3

ACCOU-2140 Chapter Notes - Chapter 3: Accrual, Income Statement


Department
Accounting
Course Code
ACCOU-2140
Professor
Rien
Chapter
3

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Chapter 3. Adjusting Accounts for Financial Statements
Accrued Revenue
Accrued revenues are revenues earned in a period that are both unrecorded and not yet
received in cash (or other assets). An example is a technician who bills customers after the job
is done. If one-third of a job is complete by the end of a period, then the technician must record
one-third of the expected billing as revenue in that period even though there is no billing or
collection.
Framework
The adjusting entries for accrued revenues increase a revenue (income statement) account and
increase an asset (balance sheet) account, as shown. Accrued revenues usually come from
services, products, interest and rent. We use service fees and interest to show how to adjust for
accrued revenues.
Expenses
Liabilities
DEBIT Asset
CREDIT Revenue
Accrued Services Revenue
Accrued revenues are recorded when adjusting entries are made at the end of the accounting
period. These accrued revenues are earned but unrecorded because either the buyer has not
yet paid of the seller has not yet billed the buyer. Paul’s General provides an example.
Step 1: In the second week of December, Paul’s General agreed to provide 30 days of consulting
services to a fitness club for a fixed fee of $2,700 (or $90 per day). Paul’s General will provide
services from December 12 through January 10, or 30 days of service. The club agrees to pay
Paul’s General $2,700 on January 10 when the service is complete.
Step 2: At December 31, 20 days of service \s have already been provided. Because the
contracted services have not yet been entirely provided, Paul’s General has neither billed the
club nor recorded the services already provided. Still, Paul’s General has earned two-thirds of
the 30-day fee, or $1,800 ($2,700 x 20/30). The revenue recognition principle requires Paul’s
General to report $1,800 on the December income statement. The balance sheet reports that
the club owes Paul’s General $1,800.
Step 3: The adjusting entry for accrued services
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