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Performed 5000 Worth of Service For A Customer On Account: Accrual
Performed 5000 Worth of Service For A Customer On Account: Accrual
account.
5,000 5,000
ACCRUAL
We received a cash advance of ₱5,000 from a
customer.
Cash 5,000.00
Unearned Revenue 5,000.00
5000.00 5000.00
DEFERRAL
DEFE
DEFERRALS
• In accounting, this means to defer or to delay recognizing certain revenues or expenses on the
income statement until a later, more appropriate time.
• The postponement of the recognition of “an expense already paid but not yet incurred”
(Deferred Expense) or of “a revenue already collected but not yet earned” (Deferred Revenue)
Liability Method- Under the liability method, a liability account is recorded when the
amount is collected. The common accounts used are: Unearned Revenue, Deferred
Income, Advances from Customers, etc.
Income Method- Under the income method, the accountant records the entire
collection under an income account.
Example 1. On Dec 7, MicroTrain Company received $4,500 from a customer in payment for future training services.
(Liability Method)
Dec 7
Cash 4,500.00
Unearned Revenue 4,500.00
Adjusted:
Dec 31
Unearned Revenue 1,500.00
Service Revenue 1,500.00
4,500x1/3= 1,500
Income Method
Dec 7
Cash 4,500.00
Service Revenue 4,500.00
Adjusted:
Dec 31
Service Revenue 3,000.00
Unearned Revenue 3,000.00
Example 2: Suppose on January 10, 2019, ABC Company made $30,000 advanced collections from its customers.
Liability Method
Jan 10
Cash 30,000.00
Unearned Revenue 30,000.00
Adjusted:
Jan 31 At the end of the month 20% of unearned
Unearned Revenue 6,000.00 revenue is incurred
Service Income 6,000.00
Income Method
Jan 10
Cash 30,000.00
Service Income 30,000.00
Adjusted:
Jan 31
Service Income 24,000.00
Unearned Revenue 24,000.00
DEFERRED EXPENSE
Expense Method- Under the expense method, the accountant initially records the
entire payment as expense.
GVG Company acquired a six-month insurance coverage for its properties on September 1, 2019 for a total of $6,000.
Asset method
Dec 1
Prepaid Insurance 6,000.00
Cash 6,000.00
On December 31, 2019, the end of the accounting period, part of the prepaid insurance already has expired (hence,
expense is incurred). The expired part is the insurance from September to December .
Adjusted:
Dec 31
Insurance Expense 4,000.00
Prepaid Insurance 4,000.00
Expense Method
Sept 1 Insurance Expense 6,000.00
Cash 6,000.00
Adjusted:
Dec 31 Prepaid Insurance 2,000.00
Insurance Expense 2,000.00
Mario Drugstore issued a check for P9,000 on November 1 representing six months advance rental for a store space
owned by Madrigal Realty.
Adjusted:
Dec 31 Rent Expense 3,000.00
Prepaid Rent 3,000.00
If the company made use of the expense method, the initial entry would be:
Nov 1 Rent Expense 9,000.00
Cash 9,000.00
Adjusted:
Dec 31 Prepaid Rent 6,000.00
Rent Expense 6,000.00