![]() Now we can see the beginning balance and the ending balance in the T-account. So if $2,500 is not the balance, then what is the balance? If the business has earned $2,500 of the $4,000, then the new balance is $1,500. Is that the new balance in the account? No, the $2,500 is the amount we need to remove from the account because it is no longer unearned. Unearned revenue is a liability account and therefore the normal balance is a credit. We are told the account has an unadjusted balance of $4,000. Here is the T-Account for unearned revenue. T-accounts are really helpful when doing adjusting entries because you can visualize what is happening. You want to ask yourself if the transaction is giving you the amount of the adjustment (revenue or expense to be recorded) or the adjusted (correct) balance in the asset or liability account. When looking at transactions like this one, we need to determine what we are being given. An analysis of the account shows that $2,500 of the balance has been earned. Unearned revenue has an unadjusted balance of $4,000. Let’s look at how these transactions could be written so you can see the differences and identify which method to use. We could be told how much revenue has been earned or we could be told the remaining balance in unearned revenue. Transactions of this type can be written two different ways. On December 31, KLI Video Production had completed $3,000 worth of work for clients which has not yet been billed.Īnother type of unrecorded revenue deals with work the business was paid for before the work was completed (unearned revenue) which was completed by the end of the period. This entry looks exactly like an entry to record work that has been completed but have not yet been paid for. Maybe the business just hasn’t gotten around to completing the invoice yet, or maybe the work is partially done but not completely finished. If a business has done work for a client but has not yet created an invoice, there is unrecorded revenue that must be recorded. Cash is never an account in an adjusting entry. There is no reason why a business shouldn’t know about transactions affecting its cash accounts. With electronic banking, we can instantly check cash transactions. When cash is spent, the transactions are recorded immediately. Most adjusting entries are done after year end and backdated to the end of the year. NOTE: Cash should never appear in an adjusting entry. If the company has already recorded all those things, then what could possibly be left to do? You would be surprised! Expenses are recorded when bills (accounts payable) are received. Revenue is also recorded when invoices (accounts receivable) are created. When work is done and the company is paid, revenue is recorded. Ask yourself “what must I do to the account to get the adjusting balance?”Īs a business goes through the normal day-to-day operations, many transactions are recorded. When analyzing adjusting entry transactions involving assets and liabilities, remember that you are recording the change in the balance, not the new balance in the account. Adjusting entries are dated for the last day of the period. In addition to ensuring that all revenue and expenses are recorded, we are also making sure that all asset and liability accounts have the proper balances. Many adjusting entries deal with balances from the balance sheet, typically assets and liabilities, that must be adjusted. The purpose of adjusting entries is to ensure that all revenue and expenses from the period are recorded. The matching principle states expenses must be matched with the revenue generated during the period. ![]()
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