An Example of Accrued Revenue

Example: Products are sold at $5,000 on May 1, 2010 and cash is received on May 10, 2010.
May 1, 2010

May 10, 2010

Revenue is recognized.

Cash is received.

[Journal entry on May 1, 2010]

Debit

Credit

Accounts receivable
5,000
Sales
5,000

[Journal entry on May 10, 2010]

Debit

Credit

Cash
5,000
Accounts receivable
5,000

An Example of Accrued Expense

Example: On May 1, 2010, Company A borrowed $100,000 from a bank and promised to pay 12% interest at the en
of each quarter.
May 31, 2010

June 30, 2010

Interest expense is recognized

for May.

Cash is paid at the end of the

quarter.

[Journal entry on May 1, 2010]

Debit
Cash
100,000

Credit

Borrowings from bank

100,000

[Journal entry on May 31, 2010]

Debit

Credit

Interest expense
1,000
Interest payable
1,000

$100,000 x 12% x 1/12 = $1,000 for each month.

Interest payable is a liability account.
Credit side of interest payable (a liability account) represents an increase.
[Journal entry on June 30, 2010]

Debit

Credit

Interest expense
1,000
Interest payable
1,000

Credit side of interest payable (a liability account) represents an increase.

Debit

Credit

Interest payable
2,000
Cash
2,000

Company pays $2,000 as interests for May and June.

Debit side of interest payable (a liability account) represents a decrease.

An Example of Deferred Revenue

Example: On May 1, 2010, Company A had a new lease contract with a tenant and received $6,000 for two month
rent.
May 1, 2010

May 31 and June 30 2010

Cash is received.

Revenue is recognized at the end

of May and June.

Revenue is recognized when Company A provides service. In this example, service is provided when time passes.
[Journal entry on May 1, 2010]

Debit

Credit

Cash
3,000
Unearned rent revenue
3,000

Unearned rent revenue is a liability account.

Credit side of unearned rent revenue (a liability account) represents an increase.

"Unearned revenue" accounts represent the amount of cash received before services are provided. Since services hav
not been provided yet, it is not revenue.
"Unearned revenue" accounts are liabilities of the company, because they should be paid back to the other party if
service is not provided in the future.
[Journal entry on May 31, 2010]

Debit

Credit

Unearned rent revenue

3,000
Rent revenue
3,000

Debit side of unearned rent revenue (a liability account) represents a decrease.

Credit side of rent revenue (a revenue account) represents an increase.
[Journal entry on June 30, 2010]

Debit

Credit

Unearned rent revenue

3,000
Rent revenue
3,000

Debit side of unearned rent revenue (a liability account) represents a decrease.

Credit side of rent revenue (a revenue account) represents an increase.

An Example of Deferred Expense

Example: Company A purchased an insurance for a period from May 1, 2010 to July 31, 2010 and paid $6,000 cash
for three month insurance premium.
May 1, 2010

May 31, June 30, July 31, 2010

Cash is paid.

Expense is recognized at the end of

May, June and July.

[Journal entry on May 1, 2010]

Debit

Credit

Prepaid insurance
6,000
Cash
6,000

Prepaid insurance is an asset account.

Debit side of prepaid insurance (an asset account) represents an increase.
[Journal entry on May 31, 2010]

Debit

Credit

Insurance expense
2,000
Prepaid insurance
2,000

Credit side of prepaid insurance (an asset account) represents a decrease.

[Journal entry on June 30, 2010]

Debit
Insurance expense
2,000

Credit

Prepaid insurance
2,000

Credit side of prepaid insurance (an asset account) represents a decrease.

[Journal entry on July 31, 2010]

Debit

Credit

Insurance expense
2,000
Prepaid insurance
2,000

Credit side of prepaid insurance (an asset account) represents a decrease.