There are four types of adjustments prepaid expense unearned revenue Example Exercise 3-2 There are four types of adjustments prepaid expense unearned revenue accrued expense accrued revenue Deferrals Accruals Recall from Example Exercise 3-1 that there are four types of adjusting entries. Prepaid expenses and unearned revenues are referred to as deferrals because the recording of the expense or revenue is [CLICK] deferred until a future period. Accrued expenses and revenues are referred to as accruals because the related expense or revenue is recorded or [CLICK] accrued in the current period.

Example Exercise 3-2 Example Exercise 3-2 is a continuation of Example Exercise 3-1 in that we focus on your understanding of the four categories of entries that need adjusting.

Example Exercise 3-2 (a) Accrued expense The first item is wages that are owed, but not yet earned. Which of the four items does it best describe? Wages that have “built up” or accrued, are debts that grow each day the workers perform their duties. Usually once a week the workers are paid and the accrued expense [CLICK] is satisfied.

Example Exercise 3-2 (b) Prepaid expense Supplies on hand represent supplies paid for in advance and are thus a prepaid expense. [CLICK]

Example Exercise 3-2 (c) Unearned revenue Fees received but not yet earned are fees that are received in cash but are not yet recorded as revenue earned, thus such fees are unearned revenue. [CLICK]

Example Exercise 3-2 (d) Accrued revenue Fees earned but cash is not yet received are considered accrued revenue. [CLICK] The service, such as providing counseling, may be provided with the arrangement that the person benefiting from the counseling will pay later. Thus, the revenue has been earned despite cash not being received.

Example Exercise 3-2 For Practice: PE 3-2A, PE 3-2B Refer to Practice Exercise PE 3-2A and PE 3-2B for practice on determining types of adjustments. For Practice: PE 3-2A, PE 3-2B