F2 - M3 - Adjusting Journal Entries

Question 1

What does accrue mean?

Answer 1

That means to record revenue or an expense without the exchange of cash.

Question 2

What is unearned or deferred revenue?

Answer 2

This is when you received the cash, but the work was not done yet. You cannot recognize revenue, rather, you defer the revenue and increase your cash account.

DR: Cash
CR: Unearned Revenue

Question 3

What is prepaid or deferred expense?

Answer 3

This is when you pay for something before the expense is incurred. Think about paying a whole years rent before it is due. You cannot expense everything the day you pay it, you expense over time.

DR: Prepaid Exp
CR: Cash

Question 4

What is accrued revenue (receivables)?

Answer 4

This is when you accrue revenue before the payment has come in. So you performed the service, billed the client but didn’t get the money yet. That is a receivable.

DR: Accounts Rec
CR: Revenue

Question 5

What is accrued expense (payable)?

Answer 5

This is when you accrue expenses before the you have paid it. So you get the bill, but you plan to pay at the end of the month. You can expense that amount now since it was incurred, and then record a payable to show that you will pay later.

DR: Expense
CR: Accounts Payable

Question 6

You normally make AJE’s to adjust the accrual accounts mentioned, do we also have to make AJE’s for error’s?

Answer 6

In order to comply with GAAP, yes, you have to fix any errors.

Question 7

Do adjusting journal entries effect cash? What about error correction entries?

Answer 7

For AJE’s these normally do not impact cash, but error corrections could depending on the error.