Adjusting Entries for Accruals and Deferrals in Financial Accounting
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Adjusting Entries for Accruals and Deferrals in Financial Accounting

Accruals and Deferrals in Financial Accounting are taken up in order to reflect income when earned and expenses when incurred. Adjusting entries are usually posted to reflect Accruals and Deferrals. Accruals and Deferrals are relevant concepts in Financial Accounting as a major principle in the Generally Accepted Accounting Principles (GAAP).

Accruals and Deferrals are important aspects in Financial Accounting. These concepts are practiced by companies who opted to use Accrual Basis instead of Cash Basis method of Accounting. Accrual Basis method of Accounting is one of the major principles in the Generally Accepted Accounting Principles (GAAP) that should be practiced as developed by Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC).

Accruals and Deferrals recognize expense when incurred and income when earned, regardless of when paid and collected. Accrual Basis promotes Revenue Recognition Principle, Matching Principle and Cost Principle. Accruals and Deferrals may not be used in Cash Basis Accounting since Cash Basis only recognizes expense when paid and income when collected.

Accruals can be classified as Accrued Expense or Accrued Revenue. Deferrals can be categorized according to Prepaid Expense, Unearned Revenue, Depreciation, Amortization and Depletion.

Accrued Expense is the take up of expense even if billing is not yet received. When Accrued Expense is posted, a related Accrued Liability is also recognized.  Accrued Expenses can be Accrued Salaries, Income Tax and other Payroll Related Expenses. The adjusting entries to record Accrued Expenses are the following:

The adjusting entry to record Accrued Salaries in March 2012 but paid only in April 5;

Debit: Salaries Expense                                 XX

Credit: Accrued Salaries Payable                                 XX

The adjusting entry to record Accrued Income Tax in 2011 but payment will be made in April 15;

Debit: Income Tax Expense                         XX

Credit: Income Tax Payable                                         XX

Accrued Revenue is the take up of income even if collection is not yet received. When Accrued Revenue is posted, a related Receivable is also recognized. Accrued Revenues can be Interest Income from Investments which are already earned but payment will be made soon. Accrued Revenue also refers to goods or services already delivered or rendered but the payment will be collected in the future. The adjusting entries to record Accrued Revenue are the following:

The adjusting entry to record Interest Income earned in March 2012 but collection will be received in April;

Debit: Interest Receivable                           XX

Credit: Interest Income                                                 XX

The adjusting entry to record Service Revenue already rendered but payment will be received after the 30 days term;

Debit: Accounts Receivable                         XX

Credit: Service Revenue                                                               XX

Prepaid Expenses are expenses already paid to cover for a certain period of time. When a Prepaid Expense is initially posted, an Asset is recognized. When Prepaid Expense is allocated to Expense, the adjusting entry will result to an increase in Expense and a decrease in Asset that was initially posted. Prepaid Expenses can be Insurance, Rent, Interest, Office Supplies and many others. The initial and adjusting entries to record Prepaid Expense are the following:

The entry to record the initial payment upon purchase of Insurance covering a one-year term for 2012;

Debit: Prepaid Insurance              XX

Credit: Cash in Bank                                        XX

The adjusting entry to record the Expense for Jan 2012 which covers  1/12 of the total amount;

Debit: Insurance Expense            XX

Credit: Prepaid Insurance                             XX

Unearned Revenue is the take up of Income for the goods not yet delivered or the services not yet rendered but payment is already received. Unearned Revenue is taken up as a liability. Unearned Revenue can be opposite to Prepaid Expenses but on the side of the Service or Product Provider. The adjusting entries to record Unearned Revenue are the following:

The adjusting entry to record Rental already received from the lessee but the period has not occurred yet;

Debit: Cash in Bank                         XX

Credit: Unearned Rental Revenue           XX

The adjusting entry to record when the actual period has already occurred;

Debit: Unearned Rental Revenue XX

Credit: Rental Revenue                                 XX

Depreciation, Amortization and Depletion are taken up to allocate the value of Assets to a specified period of time. Depreciation is to Fixed Assets, Amortization is to Intangible Assets and Depletion is to Wasting Assets or Natural Resources. The adjusting entry to reflect Depreciation, Amortization and Depletion will increase Expense and decrease the book value of the Asset. The adjusting entries to record Depreciation, Amortization and Depletion are the following:

The adjusting entry to record Depreciation;

Debit: Depreciation Expense      XX

Credit: Accumulated Depreciation            XX

The adjusting entry to record Amortization;

 Debit: Amortization Expense      XX

Credit: Accumulated Amortization           XX

The adjusting entry to record Depletion;

Debit: Depletion Expense            XX

Credit: Accumulated Depletion                  XX

Accruals and Deferrals have vital role in the implementation of appropriate recognition of Income and Expenses in Financial Accounting because these reflect the true value of amounts presented in the Financial Statements.

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Comments (1)

Interesting to a point, not being in accounting field leaves me feeling it is a another language.

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