Unearned and Accrued Revenue Accounting ch.16 unit 4

why are balance day adjustments made?

To ensure revenue accounts show revenue earned and expense accounts show expenses incurred in the current Period, allowing accurate profit to be calculated.

Under the Accrual basis, how is profit calculated?

By matching revenue earned against expenses incurred in the current Period.

Under the Accrual basis, how is profit calculated?

By matching revenue earned against expenses incurred in the current Period.

revenue

An increase in assets or decrease in liabilities that causes an increase in owner's equity, excluding owner contributions.

Does revenue require cash to be received?

No. Revenue is recognised when it is earned, not necessarily when cash is received.

unearned revenue

a current liability that arises when cash is received in advance for revenue that is yet to be earned

Why is unearned revenue a liability?

The business still has an obligation to provide goods or services to the customer.

How is unearned revenue initially recorded?

Dr Bank
Cr Unearned Revenue

What is the BDA when unearned revenue becomes earned?

Dr Unearned Revenue
Cr Revenue

What happens to the Accounting Equation when unearned revenue is earned?

• Assets: No effect

• Liabilities: Decrease

• Owner's Equity: Increase

What happens to unearned revenue after the BDA?

It decreases to show the amount still unearned / owed to customers.

How do you remember the unearned revenue adjustment?

Take away the amount earned from the liability.

What is a deposit for a sale initially treated as?

Unearned sales revenue, which is a current liability.

Does GST apply when a deposit is received?

No. GST is recognised when the sale occurs.

What happens when the sale occurs after a deposit?

The deposit liability is reduced, Sales revenue is recognised, GST is recorded, and Cost of Sales and Inventory are recorded.

accrued revenue

a current asset that arises when revenue has been earned but cash is yet to be received

Why is accrued revenue an asset?

The business is owed cash, creating a future economic benefit.

What is the BDA for accrued revenue?

Dr Accrued Revenue
Cr Revenue

What happens to the Accounting Equation from an accrued revenue BDA?

• Assets: Increase

• Liabilities: No effect

• Owner's Equity: Increase

How do you remember the accrued revenue adjustment?

Add on the extra revenue earned to the revenue already received.

Why does Bank not change in an accrued revenue BDA?

Because no cash has been received yet.

What is the difference between accrued revenue and Accounts Receivable? how can we distinguish the two?

• Accrued revenue: Revenue earned but not received, not from a credit sale.

• Accounts Receivable: Amount owed from a credit sale.

difference:

• Accrued revenue: Usually supported by a memo because it is not yet due/invoiced.

• Accounts Receivable: Supported by an invoice.