Classifying Types of Adjustments

Classify the following items as (a) prepaid expense, (b) unearned revenue, (c) accrued revenue, or (d) accrued expense:

1. A two-year premium paid on a fire insurance policy.

2. Fees earned but not yet received.

3. Fees received but not yet earned.

4. Salary owed but not yet paid.

5. Subscriptions received in advance by a magazine publisher.

6. Supplies on hand.

7. Taxes owed but payable in the following period.

8. Utilities owed but not yet paid.

1. prepaid expense (a)

2. accrued revenue (c)

3. unearned revenue (b)

4. accrued expense (d)

5. accrued expense (d)

6. prepaid expense (a)

7. accrued expense (d)

8. accrued expense (d)

Explanation:

account adjustments are entries in account journals that are done at the end of an accounting period to bring account balances up-to-date.

Now, let me define each of the types of adjustments shown in this question and match them with each of the number choices made:

(a) prepaid expenses: prepaid expenses are payments made for goods and services in advance. Example are insurances. You don't really need to pay money for your car when it is in perfect condition, but you do so in insurances, so that in case you there is an accident in future, you have already paid for it in the past. In our question this type of payment is seen in; a two-year premium paid on fire insurance (1) and supplies on hand. Supplies on hand are items that are not needed immediately, but are purchased and stored for advance use. This is a form of paying for something before it is needed.

(b) unearned revenue : an unearned revenue is the amount gotten before the provision of goods or services. In our question this occurred in; fees received but not earned.

(c) accrued revenue : this includes the sale of goods or services that have been supplied or recognized by the seller, but have not been billed to the customer that is the customer has received but has not payed. It is revenue, just not physically present. Example here is, fees earned but not received.

(d) accrued expense : this is expense that has been made but has not yet been payed for. They can also be said to be those liabilities that have been built up over time and are due to be paid. It is mostly used to describe debt owed. Examples here are; salary owed but not yet paid (due to be paid) (4), subscriptions received in advance by a magazine publisher (magazine has been received and probably read but not paid for) (5), Taxes owed but payable in the following period (7) and Utilities owed but not yet paid (8).