Chapter 2 Review of the Accounting Process Communication Case 2–3 - Edubirdie

University:
Concordia University Wisconsin
Course:
ACCT 3100 | Intermediate Accounting I
Academic year:

2021
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191

Pages:

1
Author:

5prinzg1s

Communication Case 2–3 Requirement 1 Prepayments occur when the cash flow precedes either expense or revenue recognition. Accruals occur when the cash flow comes after either expense or revenue recognition. Requirement 2 The appropriate adjusting entry for a prepaid expense is a debit to expense and a credit to the prepaid asset. For unearned revenue, the appropriate adjusting entry is a debit to the unearned revenue liability account and a credit to revenue. Failure to record an adjusting entry for a prepaid expense will cause assets and shareholders’ equity to be overstated. Failure to record an adjusting entry for unearned revenue will cause liabilities to be overstated and shareholders’ equity to be understated. Requirement 3 The required adjusting entry for accrued liabilities is a debit to expense and a credit to a liability. For accrued receivables, the appropriate adjusting entry is a debit to a receivable and a credit to revenue. Failure to record an adjusting entry for an accrued liability will cause liabilities to be understated and shareholders’ equity to be overstated. Failure to record an adjusting entry for accrued receivables will cause assets and shareholders’ equity to be understated. 2–98

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