Need for accruals and valuation adjustments

  • Accrual accounting (19)
    •  Revenues and expense are recorded when it occurs
  • Types of accruals:
    • Unearned revenue (20): receive cash before providing good or service
      • Cash increase, liability increase
      • Newspaper subscription
    • Accrued revenue (21): provide goods or services before receive cash payment
      • Revenue increase (equity) , account receivable increase (asset)
      • Manufacturer: 
        • Records revenue when it delivers the goods 
        • Not receive cash until retailers sell the goods to consumers
    • Prepaid expense (22): pay cash ahead of time
      • Cash (asset) decrease, prepaid expense (asset) increase
      • Expense actually incurred: Prepaid expense (asset) decrease, expense (- equity) increase
    • Accrued expense (23): Owe cash
      • Expense (-equity) increase, liability for accrued expense (liability) increase 
      • Pay cash: liability decreases, cash (asset) decrease

(Equity) Revenue: Good out

(Equity) Expense: Good in

(Asset) Prepaid expense: cash out

(Asset) Unearned revenue: cash in

  • Valuation adjustment (24)
    • Accounting entries that updates asset’s value as market value
  • Change in asset values also change owner’s equity