{"id":3081,"date":"2020-10-08T21:52:10","date_gmt":"2020-10-08T21:52:10","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=3081"},"modified":"2020-11-17T20:24:00","modified_gmt":"2020-11-17T20:24:00","slug":"types-of-adjusting-journal-entries","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/types-of-adjusting-journal-entries\/","title":{"raw":"Types of Adjusting Journal Entries","rendered":"Types of Adjusting Journal Entries"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Differentiate between deferrals and accruals<\/li>\r\n<\/ul>\r\n<\/div>\r\nIn accounting, we classify adjustments in one of two ways: a deferral or an accrual. They are the opposite of each other. If you look up the word <em>accrue<\/em>, you\u2019ll find it basically means to add to. The word <em>defer<\/em> actually means to put off to later.\r\n\r\nIn accounting, it\u2019s easy to tell if an expense or revenue is deferred or accrued when the cash comes in.\r\n<ul>\r\n \t<li>If you earn revenue <em>before<\/em> you get the cash, you have to <em>accrue<\/em> the revenue (add it to your books). Accrued revenue is an asset (accounts receivable, most likely).<\/li>\r\n \t<li>If you get the cash before you earn the revenue, you have to <em>defer<\/em>\u00a0recognition of the revenue. In fact, getting the cash before you earn the revenue means you have a liability (deferred revenue = liability).<\/li>\r\n<\/ul>\r\nThe same idea holds true for expenses.\r\n<ul>\r\n \t<li>If you pay an expense in advance, like insurance, where you may pay an annual premium that expires (is used up) monthly, you have a deferred expense. A deferred expense is an asset.<\/li>\r\n \t<li>If you have expenses that you haven\u2019t recorded yet, say a bill from your attorney, you have to accrue that expense (add it to your books). An accrued expense is a liability.<\/li>\r\n<\/ul>\r\n<img class=\"alignright wp-image-3314\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12174147\/savings-2789112_1920-1024x683.jpg\" alt=\"A stack of coins being measured with a clamp.\" width=\"400\" height=\"267\" \/>Accrued revenues are common at the end of the year when we are doing work but have not recorded the revenue yet. This would also apply to interest earned on notes receivable even if the interest is not due until the next year.\r\n\r\nA common example of an accrued expense is when employees worked during the last week of the year but won\u2019t be paid until the next regular payday, which is in the next year. The expense needs to be matched with the revenue of the period. Interest expense is another example: since it accrues by the day, we need to adjust for the expense for the amount of time the note is outstanding during the accounting period.\r\n\r\nThere is one more type of journal entry that doesn\u2019t fit a tidy classification. For instance, if you find an error or some other material misstatement, you may use an adjusting entry to correct it.\r\n\r\nIn the next section, we\u2019ll cover adjusting for deferred and accrued revenues, and then deferred and accrued expenses, as well as other kinds of adjusting journal entries that we may need to get our basic bookkeeping records to comply with Generally Accepted Accounting Principles (GAAP) so we can produce our financial statements.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23380\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23381\r\n\r\n[ohm_question hide_question_numbers=1]202380[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Differentiate between deferrals and accruals<\/li>\n<\/ul>\n<\/div>\n<p>In accounting, we classify adjustments in one of two ways: a deferral or an accrual. They are the opposite of each other. If you look up the word <em>accrue<\/em>, you\u2019ll find it basically means to add to. The word <em>defer<\/em> actually means to put off to later.<\/p>\n<p>In accounting, it\u2019s easy to tell if an expense or revenue is deferred or accrued when the cash comes in.<\/p>\n<ul>\n<li>If you earn revenue <em>before<\/em> you get the cash, you have to <em>accrue<\/em> the revenue (add it to your books). Accrued revenue is an asset (accounts receivable, most likely).<\/li>\n<li>If you get the cash before you earn the revenue, you have to <em>defer<\/em>\u00a0recognition of the revenue. In fact, getting the cash before you earn the revenue means you have a liability (deferred revenue = liability).<\/li>\n<\/ul>\n<p>The same idea holds true for expenses.<\/p>\n<ul>\n<li>If you pay an expense in advance, like insurance, where you may pay an annual premium that expires (is used up) monthly, you have a deferred expense. A deferred expense is an asset.<\/li>\n<li>If you have expenses that you haven\u2019t recorded yet, say a bill from your attorney, you have to accrue that expense (add it to your books). An accrued expense is a liability.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-3314\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12174147\/savings-2789112_1920-1024x683.jpg\" alt=\"A stack of coins being measured with a clamp.\" width=\"400\" height=\"267\" \/>Accrued revenues are common at the end of the year when we are doing work but have not recorded the revenue yet. This would also apply to interest earned on notes receivable even if the interest is not due until the next year.<\/p>\n<p>A common example of an accrued expense is when employees worked during the last week of the year but won\u2019t be paid until the next regular payday, which is in the next year. The expense needs to be matched with the revenue of the period. Interest expense is another example: since it accrues by the day, we need to adjust for the expense for the amount of time the note is outstanding during the accounting period.<\/p>\n<p>There is one more type of journal entry that doesn\u2019t fit a tidy classification. For instance, if you find an error or some other material misstatement, you may use an adjusting entry to correct it.<\/p>\n<p>In the next section, we\u2019ll cover adjusting for deferred and accrued revenues, and then deferred and accrued expenses, as well as other kinds of adjusting journal entries that we may need to get our basic bookkeeping records to comply with Generally Accepted Accounting Principles (GAAP) so we can produce our financial statements.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23380\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23380&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23380\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"lumen_assessment_23381\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23381&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23381\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p><iframe loading=\"lazy\" id=\"ohm202380\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=202380&theme=oea&iframe_resize_id=ohm202380\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-3081\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Types of Adjusting Journal Entrie. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li><strong>Authored by<\/strong>: stevepb. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/savings-budget-investment-money-2789112\/\">https:\/\/pixabay.com\/photos\/savings-budget-investment-money-2789112\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":17,"menu_order":4,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Types of Adjusting Journal Entrie\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen 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