The second category of Adjusting Entries is Accrual Adjustment. Prior to an accrual adjustment, the Revenue Accounts (and the related asset account) or the expense account (and the related liability account) are understated. Thus, the accrual adjustment will increase both a Balance Sheet and an Income Statement account. There are two types of accrual adjustment.
- Accrued Revenues and
- Accrued Expenses
Revenue earned but not yet received in cash in accounting year. Revenues earned but not yet recorded at the statement date are Accrued Revenues. Accrued revenues may accumulate (accrue) with the passing of time, as in the case of interest revenue. These are unrecorded because the earning of interest does not involve daily transactions. Companies do not record interest revenue on a daily basis because it is often impractical to do so.
Example # 1:
Rs. 100,000 fixed deposits amount in bank in July 01, 2015 and contract is to earn 10% per annum at the end of contract year?
So in this case we will receive Rs. 10,000 at June 2016, but we have earned interest of six months in this period 20015, so pass adjusted entry.
>>> Practice Adjustment Entries Quiz 2.