Page 119 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

An accounting perspective:

Uses of technology

Eventually, computers will probably enter adjusting entries continuously on a real-time basis so
that up-to-date financial statements can be printed at any time without prior notice. Computers
will be fed the facts concerning activities that would normally result in adjusting entries and
instructed to seek any necessary information from their own databases or those of other computers
to continually adjust the accounts.

Classes and types of adjusting entries
Adjusting entries fall into two broad classes: deferred (meaning to postpone or delay) items and accrued
(meaning to grow or accumulate) items. Deferred items consist of adjusting entries involving data previously
recorded in accounts. These entries involve the transfer of data already recorded in asset and liability accounts to
expense and revenue accounts, respectively. Accrued items consist of adjusting entries relating to activity on

which no data have been previously recorded in the accounts. These entries involve the initial, or first, recording of
assets and liabilities and the related revenues and expenses (see Exhibit 16).
Deferred items consist of two types of adjusting entries: asset/expense adjustments and liability/revenue
adjustments. For example, prepaid insurance and prepaid rent are assets until they are used up; then they become
expenses. Also, unearned revenue is a liability until the company renders the service; then the unearned revenue
becomes earned revenue.
Accrued items consist of two types of adjusting entries: asset/revenue adjustments and liability/expense
adjustments. For example, assume a company performs a service for a customer but has not yet billed the customer.
The accountant records this transaction as an asset in the form of a receivable and as revenue because the company

has earned a revenue. Also, assume a company owes its employees salaries not yet paid. The accountant records
this transaction as a liability and an expense because the company has incurred an expense.

Accounting Principles: A Business Perspective 120 A Global Text