Accounting_Cycles

2011 Accounting Cycles There are a great many number of details that the accountant must consider when recording entries in order to keep account information complete, and most importantly accurate. One such process that helps us to make sure financial data is consistent and correct is that of adjusting journal entries. In a nutshell adjusted journal entries are entries made when a company incurs an expense that has not been recorded, or earns revenue that has yet to be recorded; furthermore these adjusted entries will always one account in the income statement and one account that resides in the balance sheet. Where adjusted journal entries are concerned there are four types. Unearned game revenue | | 1800 | | 1800 | The first type - deferred revenue- would be defined as earnings a company receives before providing a service. Suppose 30 customers purchase reservations for Capcoms upcoming release Street Fighter x Tekken deciding to pay for the game in its entirety; Capcom records a cash revenue to the tune of about $1800 in the developers account, but the customers have yet to receive the actual product which is likely six months or more away. Until the game is released and those 30 customers have the game in their PS3s or Xbox360s Capcom must record this deferred revenue as a liability. cash | 1800 | | 1800 | | Game revenue | | 0 | | 0 | Notice the "Game revenue" table remains at zero as the money does not quite belong to the developer yet. When this changes we will see a deduction from the "unearned game revenue" table and 1800 will be added to our revenue section. The next type of adjustment is the accrued revenue; this is when revenue is recorded before actually receiving cash. A dealerships service department provides a good example of this type of revenue; when a dealer diagnoses a car, a service price is quoted and then billed to the customer once the vehicle repairs are finished. If it costs my $1500 to have brakes and a timing belt installed on my Nissan at Fictional Nissan; the journal entry would record both a service revenue and accounts receivable amount of $1500. Cash | 0 | | 0 | | Accounts Receivable | 1500 | | 1500 | | Fictional Nissan Revenue | 1500 | | 1500 | | Until I made my way back to the dealership to take care of my hefty repair bill accountants at Fictional Nissan can record a revenue earnings, yet there is not an entry into the cash account. Ins. expense | 0 | | 0 | | Using the same scenario suppose Fictional Nissan pays DealerShip Insurance a $100,000 a year insurance premium to protect all vehicles on their lot; Fictional Nissan would then be incurring a deferred expense. A deferred expense occurs when an organization pays for a service it has yet to use; in this case insurance. Cash | 1,000,000 | 100,000 | 900,000 | | DS Insurance | 100,000 | | 100,000 | | The final type of adjusted journal entry comes in the form of accrued expense. An accrued expense is another form of liability in which an organization incurs an expense and pays for it at a later time; let us go back to Fictional Nissan once more. Suppose the owner of the organization hired a team of network security specialists to install and secure the company's intranet and perform security protocol updates which include changing firewall encryption every six months. The team is contracted and Fictional is billed $24,000 for each visit. Until Fictional Nissan pays the bill from the network security specialists, the expense is entered into computerized journal as such: Cash | 1,000,000 | | 1,000,000 | | Accts. payable | | 24,000 | | 24,000 | Ntwk. expense | 24,000 | | 24,000 | | As one might imagine, a number of ethical issues can present themselves when dealing with this type of record keeping. One of notable concern would be that of embezzling; it would be very easy to fudge the numbers on an adjusted journal entry, or perhaps fabricate a false journal entry in the interest of pocketing company money.