FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Transcribed Image Text:### Instructional Content for Educational Website
#### Understanding Accrued Fees and Adjusting Journal Entries
**Scenario:**
At the end of the current year, $21,200 of fees have been earned but have not been billed to clients.
**Required Tasks:**
**A. Journalize the Adjusting Entry**
- **Objective:**
Record the accrued fees on December 31.
- **Method:**
Refer to the Chart of Accounts for the exact wording of account titles. The general journal entry to record the accrued fees typically involves:
1. **Debit** to Accounts Receivable account to recognize the income that has been earned but not yet billed.
- *Accounts Receivable* \(Debit\) \$21,200
2. **Credit** to Fees Earned (or similar revenue account) to reflect the earned revenue.
- *Fees Earned* \(Credit\) \$21,200
This entry ensures that the revenue is recognized in the accounting period in which it was earned, following the accrual basis of accounting.
**B. Consideration of Cash Basis Accounting**
- **Question:**
If the cash basis rather than the accrual basis had been used, would an adjusting entry have been necessary?
- **Answer:**
Under the cash basis of accounting, revenues are recorded only when cash is received. Therefore, if the cash basis had been used, an adjusting entry for accrued fees would not be necessary because no cash changes hands in this scenario until the fees are actually billed and paid. Hence, revenue would be recorded in the period when the payment is received, not when it is earned.
#### Additional Notes:
**Understanding Adjusting Entries:**
Adjusting entries are crucial for ensuring that revenues and expenses are recorded in the appropriate accounting period, thus reflecting an accurate financial position of the business at the end of the period.
**Accrual vs Cash Basis Accounting:**
- **Accrual Basis:** Recognizes revenues and expenses when they are incurred, regardless of when cash transactions happen.
- **Cash Basis:** Recognizes revenues and expenses only when cash transactions occur.
The accrual basis provides a more accurate financial picture as it includes all earned revenues and incurred expenses within the relevant period, contributing to effective decision-making and performance assessment.
For further clarification or assistance with these accounting concepts, please refer to our additional resources or contact our support team.
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