Question

E3-19A. (Learning Objectives 1, 3: Explain how accrual accounting differs from cash-basis accounting; adjust the accounts) An accountant made the following adjustments at December 31, the end of the accounting period a. Prepaid insurance, beginning, $500. Payments for insurance during the period, $2,000 Prepaid insurance, ending, $400. b. Interest revenue accrued, $2.500 c. Unearned service revenue, beginning, $1,700. Unearned service revenue, ending, $300 d. Depreciation on building, $5,600 e. Employees' salaries owed for two days of a five-day work week; weekly payroll, S19,000. f. Income before income tax, $21,000. Income tax rate is 35%

Answer 1

Answer

• Accrual Accounting differs from Cash accounting on the consideration of when to recognised or record the revenues and expenses.
• As per Accrual accounting, Revenues and expenses are to be recorded as and when they are EARNED or INCURRED, (respectively) whether cash has been received or not.
• As per Cash Accounting, Revenues and expenses are to be recorded ONLY when they are received or paid (respectively) in CASH.
• Adjustment entries, as asked:

Adjustments #	Accounts title	Debit	Credit
a	Insurance Expense [500 + 2000 - 400]	$2,100
	Prepaid Insurance		$2,100
	(Insurance expired)
b	Interest receivables	$2,500
	Interest Revenue		$2,500
	(Interest income accrued to be received)
c	Unearned Service Revenue [1700 - 300]	$1,400
	Service revenue		$1,400
	(revenue now earned)
d	Depreciation expense - Building	$5,600
	Accumulated Depreciation - Building		$5,600
e	Salaries expenses [19000 x 2days/5days]	$7,600
	Salaries Payable		$7,600
	(2 days salaries accrued to be paid)
f	Income tax expense [21000 x 35%]	$7,350
	Income tax payable		$7,350