Tuesday, January 13, 2009

Adjusting Entries Deferral Example

Deferral Example:  Prepaid Expenses – These are assets that represent amounts paid in advance for something that will be used later.  They generally include insurance, supplies, advertising, and rent.  The company pays for these before using them to generate revenue or use them for other purposes.

Deferral Example: Plant Assets (Property, Plant, and Equipment -- PPE) – When an asset that will be used in business operations for more than one year is acquired, the cost is debited to the asset account.  Depreciation is then calculated and represents the allocation of the cost of the plant asset.  Other examples of plant assets include buildings, equipment, autos and furniture.

Deferral Example:  Unearned Revenue This is a liability account that represents the receipt of cash before the revenue has been earned.  The company receives payment for goods or services before it has earned the revenue and can properly account for it.  A liability exists because the company either must deliver the goods or provide the services or it must refund the payment.

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