Howmany adjusting entries are there in an accounting cycle and how the Pre-paid expenses, Un eanrned revenue are adjusted?

How do I handle adjusting entries

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Originally Posted by matifikram

Howmany adjusting entries are there in an accounting cycle and how the Pre-paid expenses, Un eanrned revenue are adjusted?

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Too big and ambiguous of a question. First of all, "how many" could be hundreds. It's all based on the company and what types of things exist and how they have been handled. When you first learn them, you of course will learn a very limited number of supposedly common ones. Books are similar in this regard, but not exactly alike. So I wouldn't even know which ones your book is doing. No way to answer that question.

There are certain types of adjusting entries though, and they all fall into these categories. The two you have mentioned are both deferrals, one a deferred expense and one a deferred revenue. Deferrals are things which have been paid up front.

Adjusting entries are about recognizing expenses and revenues which have not yet been recorded on the books, generally when the cash happens in a different accounting period. For instance, prepaid insurance is paid, say, in January, but it's a one-year policy. This is just an even allocation, divided evenly over the 12 months it covers. So you expense one month at a time. So the months the expense happens in does not coincide with when the payment was made back in January. That splitting over different accounting periods results in an adjusting entry being needed. You have to figure out how much of the insurance has expired, and that portion comes out of the prepaid insurance account and goes into the insurance expense account. When assets are consumed (expired in this case), they become expenses. How you go about figuring the expired portion depends on what information is presented in the problem.

Unearned revenues are similar, except that's when the company gets paid for services in advanced. (Versus paying an expense in advance.) So if the company got paid $3000 up front for a remodeling job, but earned only $1000 of it during the first month, then you must recognize that $1000 of earnings by recording it in the appropriate revenue account and removing it from the unearned. The unearned is a liability representing how much work you "owe," i.e. an obligation you have. Once it's earned, you no longer have that obligation and it comes back out of the unearned account. $2000 would remain in the unearned account, because that portion has not yet been earned.

It does not matter what the prepaid account is, nor what the unearned account is. These are two types of adjusting entries, and there are many that can exist that are similar. (i.e. prepaid rent, prepaid taxes, prepaid utilities, etc. and unearned fees, unearned rent, unearned subscriptions, etc.) Each type of adjusting entry works the same way -- there's just different names on the accounts.