Page 128 - Accounting Principles (A Business Perspective)

3. Adjustments for financial reporting

2010 Dec. 31 Adjustment 5 1,500 Dec. 7 Cash received

in advance 4,500
Bal. after adjustment 3,000
(Dr.) Service Revenue (Cr.)
2010 10,700 Increased — by
Bal. before adjustment Dec. 31 1,500 $1,500
Adjustment 5
Bal. after adjustment 12,200
MicroTrain reports the service revenue in its income statement for 2010. The company reports the USD 3,000
balance in the Unearned Service Fees account as a liability in the balance sheet. In 2011, the company will likely
earn the USD 3,000 and transfer it to a revenue account.
If MicroTrain does not perform the training services, the company would have to refund the money to the

training service customers. For instance, assume that MicroTrain could not perform the remaining USD 3,000 of
training services and would have to refund the money. Then, the company would make the following entry:
Unearned Service Fees 3,000
Cash 3,000
To record the refund of unearned training fees.

Thus, the company must either perform the training services or refund the fees. This fact should strengthen your
understanding that unearned service fees and similar items are liabilities.
Accountants make the adjusting entries for deferred items for data already recorded in a company’s asset and
liability accounts. They also make adjusting entries for accrued items, which we discuss in the next section, for
business data not yet recorded in the accounting records.

An accounting perspective:

Business insight

According to the National Association of Colleges and Employers, the average offer to an

accounting major in 2009 was USD 48,334 and tends to increase each year. According to recent
surveys, the market for accounting graduates remains brisk. Often, one of the chief problems for
graduates is how to handle multiple job offers. As a result of the low unemployment rate,
employers—especially small accounting firms with limited recruiting budgets—are doing whatever
they can to grab qualified candidates.

Adjustments for accrued items
Accrued items require two types of adjusting entries: asset/revenue adjustments and liability/expense
adjustments. The first group—asset/revenue adjustments—involves accrued assets; the second group—
liability/expense adjustments—involves accrued liabilities.
Accrued assets are assets, such as interest receivable or accounts receivable, that have not been recorded by
the end of an accounting period. These assets represent rights to receive future payments that are not due at the

balance sheet date. To present an accurate picture of the affairs of the business on the balance sheet, firms

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