Adjusting Entries for Accruals

After Adjusting Entries for Deferrals now we will discuss on adjusting entry is accruals. Accruals means revenue is earned and an expense is incurred but they are not still recorded or collected. Adjusting entry of accruals makes accruals be recorded within proper accounting period. Accruals are two types: accrued revenues and accrued expenses

Accrued Revenues:

Accrued revenue is opposite of unearned revenue. In unearned revenue cash received in advance before service is given or product is sold. But in case of accrued revenue, revenue is earned without regard for received of cash. That means under accrued revenue though the revenue is earned but cash is not collected or recorded.  Accrued revenue is not service revenue because though revenue is earned but cash is unpaid. Accrued revenue is adjusted to know the number of receivable. It increases debit column in asset account and credit column in revenue account. For example the Independent Real Estate company deals with customer on July 20 on a monthly basis. The customer will pay $900 monthly with first payment on June 20.at the month of April the company will earn ½ of the fee 40 for work performed July 20-July 31. The adjusting entry for this transaction:

July 31

Accounts receivable……………….450
Service revenue………………450

(To record revenue for service provided)

After posting the adjusting entry the account of independent real estate company is appeared as follows:

Accounts receivable

JULY 31Adj                       450

Service Revenue

JULY 31                  12000

JULY 31                     1000

JULY 31Adj               450

The Account of Receivable shows that customers owe $450 at the particular date of balance sheet. The total balance of $13,450 in the account of Service Revenue provides the total amount of revenue which is earned by the Independent Real Estate company during the whole month. .

On August 3, the Independent Real Estate company receives cash amount of $450 for the services which is performed in July and makes the following entry.

August 3 Cash……………………. 450

Accounts Receivable……………… 450

(To record cash collected on account)

The company records cash which is collected on account with an increase in debit column to Cash account and a decrease in credit column to Accounts Receivable account.

Accrued Expense:

Accrued expense means expense is incurred but cash is not paid or recorded. The effect of accrued expense is reverse effect of prepaid expense. Any Company makes adjusting entry for accrued expense to determine the amount of accounts payable. Accrued salaries and accrued interest are the example of accrued expense.

Accrued salaries: accrued salaries are the most common example of accrued expense. Most of the company pay salary to their employees at pre programmed times. Suppose independent real estate company pay monthly salary of $3000 to their employees, $1500 at first half of the month and $1500 in the last day of the month. In below part there is a calendar of the month of august marked with 2pay days date.

Calendar

If the company cannot pay salary on the pay day due to weekend then they will pay salary on next following Monday. At august the company pays first half salary at 15th august and includes this transaction.

The adjustment for accrued salaries will be:

AUGUST 15

Salary expense…………………..$1500
Cash…………………………$1500
(To pay salary)

After posting the salary expense account will be:

Expenses

Salary Expense

AUGUST15                        1500

At last day of august in the trail balance the account of salary expense will be recorded with the debit amount of $1500.as the second payday is falls on Saturday then the second payment will be provided on Monday September 1.therefore the rest $1500 will not recorded in the trial balance of august 31 in the account of salary expense as an adjustment entry and at august 31 the company will make additional salary expense and salary payable of$1500 as increase of each account and record. This transaction will be:

August 31 Salary expense……………………..1500

Salary payable……………………….1500

(To accrue salary expense)

After posting the salary expense account and salary payable will be appeared as follows:

Expenses

Salary Expense

AUGUST15                        1500

AUGUST30                        1500

Bal                                    3000 

Liabilities

Salary Payable

  AUGUST30             1500
  Bal                            1500  

The accounts of salary expense provide the full salary update on the date of august 30 and the account of salary payable shows the amount which is owed by the company o the employees at date of august 30.

Accrued interestSuppose Independent Real Estate Company has signed a $7,000, 6-month note payable on June 2.The note entail the company to pay interest at an annual rate of 15%. For Independent Real Estate Company, the total interest due on the note at its due date is $150 ($7,000 face value x 15% interest rate x 6/12 time period)=$175 (The interest per month).

Independent Real Estate Company makes the adjusting entry at June 30.

June 30 Interest Expense……………. 175

Interest Payable……………….. 175

(To record interest on notes payable)

After posting the adjusting entry the account of independent real estate company is appeared as follows:

Interest Expense

June 30adj                          175

Interest Payable

June30adj                       175

The account of Interest Expense shows the amount of interest charges for the month June. And the account of Interest Payable shows the amount of interest that is owed at the balance sheet date of June as June is the first month of the note payable. The independent real estate company will not pay the interest until the note comes due at the end of six months.