I.

Deferral Adjustments
A deferral involves a past exchange of cash that has initially been recorded on the balance sheet
rather than on the income statement. The name deferral comes about because the recording on
the income statement is deferred (postponed) to a later time.

A. Deferred Expenses
A deferred expense is initially recorded on the balance sheet as an asset than being immediately
expensed. An adjusting entry becomes necessary as the asset is consumed and becomes an
expense.
1.

Illustration for a short-term asset

> Past exchange of cash

Asset
Cash

XXX
XXX
> Adjusting entry necessary as the asset is consumed

Expense
Asset

XXX

XXX
Example:
The supplies account currently shows a $300 balance.
determines that only $250 remains.

(Income statement)
(Balance sheet)

2.

Supplies Expense
Supplies
Illustration for a long-term asset

A count of the supplies

50
50

The adjusting entry for long-term assets differs in that instead of reducing
the asset directly; a contra account is used that is subtracted from the asset
on the balance sheet.
> Past exchange of cash
Asset
Cash

XXX
XXX

> Adjusting entry necessary as the asset is consumed

Depreciation Expense
XXX
Accumulated Depreciation
Example:
Current year depreciation is $2,500.
Depreciation Expense
Accumulated Depreciation

(Income statement)
(Balance sheet)

XXX

2,500
2,500

Note: Accumulated depreciation is a contra account that is subtracted from the

asset on the balance sheet. It has a normal credit balance.

B. Deferred Revenues
Revenue cannot be recorded until the income has been earned. Cash received in advance of
income realization should be initially recorded in a liability account such as "Unearned
Revenue". An adjusting entry later becomes necessary as the revenue is earned. The liability
should be reduced and the revenue recorded.
> Past exchange of cash
Cash
XXX
Unearned Revenue
XXX
> Adjusting entry necessary as revenue is earned
Unearned Revenue
Revenue

XXX

(Balance sheet)
XXX (Income statement)

Example:

Adams CPA previously received $500 for bookkeeping services

in advance of providing the services. Adams has now earned
$300 of the money.
Unearned Revenue
300
Revenue
300

II. Accrual Adjustments

An accrual involves a future exchange of cash that must be recorded on the income statement
before cash is exchanged.

A. Accrued Expenses
> Adjusting entry
Expense
Liability

XXX

(Income statement)
XXX (Balance sheet)

> Future exchange of cash

Liability
Cash

XXX

Interest Expense
Interest Payable

550

XXX
Example:
Interest accrued on a loan at the end of the month is $550.

B. Accrued Revenues

550

> Adjusting entry

Receivable
Revenue

XXX

(Balance sheet)
XXX (Income statement)

> Future exchange of cash

Cash
Receivable

XXX

Accounts Receivable
Revenue

400

XXX
Example:
Performed $400 of services for a customer on account.
400

Accrued revenues Say your company provided $1,600 worth of consulting services to the
Bogus Manufacturing Company over the past month, and today is the end of the accounting
period. The consulting hours will be billed and collected next month, well past when youll be
preparing a trial balance, financial statements, closing entries, etc. In this case, you need an
adjusting entry to account for the unbilled services:
Adjusting Entry
Debits
Credits
Accounts Receivable

1,600.00

Consulting Fees Earned

1,600.00
Unearned revenues Bogus Manufacturing Company purchased an annual service contract
from you for $24,000, which they paid up front. If only three months of their contract are within
this accounting period, then that means nine months of the contracts revenues are unearned. In
order to properly reflect reality, you need an adjusting entry:
Adjusting Entry
Debits
Credits
Unearned Revenue

18,000.00

Revenue
18,000.00
Accrued expenses If you pay weekly salaries and the accounting period ends mid-week,
you have accrued salary expenses that you havent yet paid. Youll need an adjusting entry to
reflect the as-yet unpaid salaries:
Adjusting Entry
Debits
Credits
Salary Expense

7,200.40

Wages and Salaries Payable

7,240.40
Prepaid expenses Lets say you paid $3,000 for your property insurance six months ago,
and you still have six paid months remaining on the policy after this accounting period. To
accurately reflect the value and expense of the remaining policy, you need an adjusting entry:
Adjusting Entry
Debits
Credits
Property & Casualty Expense

1,500.00

Prepaid Insurance
1,500.00
Other adjusting entries Your company purchased $1 million of manufacturing equipment
two years ago, and according to your depreciation schedule it has depreciated by $350,500 this

accounting period. To ensure that your balance sheet doesnt overstate the equipments value,
you need an adjusting entry:
Adjusting Entry
Debits
Credits
Depreciation Expense
Accumulated Depreciation
Equipment

350,500.00
350,500.00