Introduction to bookkeeping and accounting: 3 6 The accounting equation and the double-entry rules for income and expenses Open University

revenues and expenses

A liability resulting from the recognition of an expense before the payment of cash. The association of revenue of a period with all of the costs necessary to generate that revenue. An account with a balance that is opposite that of a related account. The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets. Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities. A series of steps performed each period and culminating with the preparation of a set of financial statements. As soon as the asset has provided benefit to the company, the value of the asset used is transferred from the balance sheet to the income statement as an expense.

  • As important as it is to recognize revenue properly, it’s equally important to account for all of the expenses that you have incurred during the month.
  • Starting at the top of the statement we know that the owner’s equity before the start of 2015 was $60,000 and in 2015 the owner invested an additional $10,000.
  • The entries are dated October 31.
  • As the benefits of the expenses are recognized, the related asset account is decreased and expensed.
  • Again, both approaches produce the same financial statement results.
  • A customer paid in advance for services, and the company recorded revenue earned after providing service to that customer.

Indicate with a Yes or No whether or not each of the following normally requires an adjusting entry. The company purchased $12,000 equipment and paid in cash. Each of these journal entries would then be manually posted to the general ledger. If you’re thinking that sounds like a lot of work and a lot of opportunities for errors, you’re right. That’s where technology comes in to make our jobs easier. Prepaid expenses are handled like deferred revenue. For instance, you decide to prepay your rent for the year, writing a check for $12,000 to your landlord that covers rent for the entire year.

How to prepare your adjusting entries

A company paid cash to a creditor for a previous purchase of supplies on account. How does this transaction affect the company’s assets, liabilities, and owner’s equity? Indicate whether each increases, decreases, or stays the same. The owner of a company invested cash in the business in exchange for capital stock. A company paid $3,132 for employee salaries. Stockholders of a company invested $18,794 cash in the business in exchange for common stock.

  • One-third of the unearned rent revenue was earned during the quarter.
  • The equipment account will increase and the cash account will decrease.
  • How does this transaction affect the company’s assets, liabilities, and owner’s equity?
  • The purpose of a journal entry is to document the financial transactions of a business.
  • Would like to know if she has been profitable or not during November.

We present nine transactions to illustrate how a company’s accounting equation stays in balance. All six types of journal entries have their unique purpose in accounting. Combined all together, these journal entries produce an accurate understanding of the company’s finances.

Deferred revenues

One important key to entries is that they need to contain enough information to clearly reflect the actual transaction. That way, instead of only having account balances, we can look back at journal entries to see what really happened and if anything was recorded incorrectly.

The information below has been gathered at December 31, 2022. Interest will be paid when the note is repaid. Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting. Adjusting entries would not be necessary if a company’s life were not divided into artificial time periods. Recognize revenue in the accounting period in which a performance obligation is satisfied. Requires adjustment, indicate the type of adjusting entry and the related account in the adjusting entry.

Balancing the Accounting Equation

On July 18th, 2022, Uncle T’s Auto received payment for a customer invoice for semi-annual policies. On June 29th, 2022, Uncle T’s Auto Insurance sold 12 different semi-annual auto-insurance plans amounting to $15,450.00.


At the financial statement date, companies increase Insurance Expense and decrease Prepaid Insurance for the cost of insurance that has expired during the period. We assume that Pioneer uses an accounting period of one month. Thus, monthly adjusting entries are made. The entries are dated October 31. Explain the accrual basis of accounting and the reasons for adjusting entries. Similar to prepaid insurance, rent also requires advanced payment. Usually to rent a space, a company will need to pay rent at the beginning of the month.

GBS Shared Service Center

This method of earnings management would probably not be considered illegal but is definitely a breach of ethics. In other situations, companies manage their earnings in a way that the SEC believes is actual fraud and charges the company with the illegal activity. Let’s assume that the company borrowed the $5,000 on December 1 and agrees to make the first interest payment on March 1. If the loan specifies an annual interest rate of 6%, the loan will cost the company interest of $300 per year or $25 per month. On March 1 the company will be required to pay $75 of interest. On the December income statement the company must report one month of interest expense of $25. On the December 31 balance sheet the company must report that it owes $25 as of December 31 for interest.

What happens after adjusting entries?

The entries are made in accordance with the matching principle to match expenses to the related revenue in the same accounting period. The adjustments made in journal entries are carried over to the general ledger that flows through to the financial statements.

A computer repair technician is able to save your data, but as of February 29 you have not yet received an invoice for his services. The owners invested $10,000 cash in the business in exchange for ordinary shares. A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the a. Stand alone concept. Monetary unit assumption.

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