In accounting what would be examples of adjusting entries for:?

Question

1)accrued expenses
2)accrued revenues
could you explain when they might occur and give an example of what they would look like.
Thanks

Answer 1

Accrued expenses are recorded to account for expenses in a period (usually month or quarter) to comply with GAAP. These entries are also reversing entries, meaning they automatically reverse (with the right system) ir another manual entry is performed the following month to reverse this accrual. This is so the expense is not double booked. For example, if you have an advertising expense for the month of June, but have not yet received an invoice, then an accrual entry needs to be recorded to recognize that expense. The entry would be a debit to the expense account (advertising) and a credit to AP accrual account. The following month this entry would reverse out because the invoice comes in and is entered as a debit to the expense account and credit to payables account. If it did not reverse out, the expense would be recorded twice - once as the adjusting entry, and 2nd as the actual invoice.

The same goes for revenue accrual. In order to recognize revenue, the service or goods must have been shipped or provided to the customer. Even when shipping goods, it the recongnition of revenue depends on if customer is responsible for goods at the time shipment leaves vendor site, or at the time the customer receives the goods. So, if a company were to provide say, clenaing service for May, this company would only book accrued revenue if they did not receive payment for May's cleaning services. Now, if they received payment in May for June cleaning services, this would have to be booked to deferred revenue, as it's not revenue for May... Again, this accrual would also have to be a reversing accrual.

For both revenue and expense accruals, they need to be monitored eahc month to ensure they don't need to be re-booked. Meaning, if you accrue for June's advertising expense, but in July the invoice still has not come in, you'd need to re-accrue for this expense.

Also, each company has a reasonable threshhold for accruals, such as all expenses over $1,000 must be acocunted for...

Answer 2

The concept of accruals accounting is to distinguish it from cash accounting where you record a transaction only if cash had been received or paid. In accruals a/cg, you have to recognise a transaction even if no cash has changed hands.

1. An eg of an accrued expense would be if a supplier delivered in Jan some stationery you ordered but for which you hadn't paid. The entry in Jan would be:
Dr Stationery $100
Cr Accrued expenses (or Accruals) $100

If you didn't pay this till Mar, the accrual would remain in the books till Mar, when the entry to make would be:
Dr Accrued expenses $100
Cr Cash $100

You need to do this for all goods and services received but not paid for. In cash a/cg, you'd only book in the transaction in Mar when it's paid, but this is not correct cos you'd have omitted the fact in Jan and Feb that you owed someone $100. That is why accruals a/cg is the preferred method.

2. Accrued revenue is just the reverse. You've received cash for goods or services you haven't delivered yet. An eg would be a magazine subscription which is usually payable a year in advance. Say a subscriber paid you $120 in Dec 06 for a year's subscription of a mag for the whole of 2007. In Dec 06, your entry would be:
Dr Cash $120
Cr Accrued (or deferred) subscription income $120

In EACH of the months Jan to Dec 07, your entry would be:
Dr Accrued subscription income $10
Cr Subscription income $10 (P/L item)

Upon making the Dec 07 entry, your accrued subscription income a/c would have been reduced to zero. Another common eg of accrued revenue would be school fees. Most schools charge by the semester, so you'd have to reverse the proportionate amt in accrued school fees a/c to school fees income a/c each month.