Deferred Revenues Previously recorded liabilities that were created when cash was received in advance and must be reduced for the amount of revenue actually earned during the period When the company delivers the goods or services UNEARNED REVENUE is reduced and REVENUE is recorded If cash is received before the company delivers goods or services the liability account UNEARNED REVENUE is recorded Examples rent received in advanced Accrued Revenues Revenues that are earned but not recorded because cash will be received after the services were performed or goods were delivered When the cash is received the ACCOUNTS RECEIVABLE is reduced If cash is received after the company delivers goods or services an asset ACCOUNTS RECEIVABLE is recorded Examples interest earned during the period On December 1 2009 Tom s Rentals received a check for 3 000 for the first four months rent from a new tenant Dec 1 Description Cash A Unearned revenue L Debit 3 000 Credit 3 000 The adjustment on December 31 2009 to reduce the liability and record the revenue earned would be Dec 31 Description Unearned rent revenue L Rent Revenue R SE Debit 750 Credit 750 At December 31st Matrix Inc earned but has not received interest on its money market account of 150 The adjustment is made to debit Interest Receivable and credit Interest Revenue Dec 31 Description Interest receivable A Interest revenue R SE Dec 31 Description Cash A Interest receivable A Debit 150 Debit 150 Credit 150 Credit 150 Deferred Expenses Previously recorded assets such as prepaid rent supplies and equipment that were created when cash was paid in advance and that must be reduced for the amount of expense actually incurred during the period through the use of the asset Examples prepaid rent supplies equipment advertising and insurance Accrued expenses Expenses that are incurred but were not yet recorded because cash will be paid after the goods or services were used Examples accrued rent accrued interest and accrued wages estimations depreciation bad debts income taxes On January 1 2009 Matrix Inc paid 3 600 for a 3 year fire insurance policy They are paying in advance for a resource they will use over a 3 year period Dec 1 Description Prepaid insurance A Cash A Debit 3 600 Credit 3 600 At December 31st Matrix must recognize the portion of the insurance that has been consumed and becomes an expense Dec 31 Description Insurance expense E SE Prepaid insurance A Debit 1 200 Credit 1 200 As of 12 27 09 Denton Inc had already paid 1 900 000 in wages for the year Denton pays its employees every Friday Year end 12 31 09 falls on a Wednesday The employees have earned total wages of 50 000 for Monday through Wednesday of the week ending 1 02 10 Dec 31 Description Wages expense E SE Wages payable L Dec 31 Description Wages payable L Cash A Debit 50 000 Debit 50 000 Credit 50 000 Credit 50 000 You will note that the earnings EPS ratio is reported on the income statement It is widely used in evaluating the operating performance and profitability of a company Closing the books Two steps are used in the closing process 1 Close revenues and gains to Retained Earnings 2 Close expenses and losses to Retained Earnings Closing entries 1 Transfer net income or loss to Retained Earnings 2 Establish a zero balance in each of the temporary accounts to start the next accounting period Post Closing Trial Balance After all temporary accounts have been closed we prepare a post closing trial balance Only assets liabilities and stockholders equity accounts will appear All revenue expense gain and loss accounts will have a zero balance
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