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THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS


When is revenue actually earned by a company? In many cases, revenue is earned when cash is received at the point of sale. For instance, when a taxicab driver takes someone to the airport, revenue is earned when the passenger is dropped off at the appropriate terminal and the fare is collected.

Suppose the same passenger boards a Carnival cruise ship to the Bahamas using a ticket that was purchased six months in advance. At what point should the cruise line recognize that ticket revenue has been earned? A recent Carnival Corporation balance sheet provides the answer to this question.

In its balance sheet, Carnival Corporation reports a $2.01 billion liability account called Customer Deposits. As passengers purchase tickets in advance, Carnival Corporation credits the Customer Deposits account for an amount equal to the cash it receives. It is not until passengers actually use their tickets that the company reduces this liability account and records Passenger Revenue in its income statement.

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

Explain the purpose of adjusting entries.

Describe and prepare the four basic types of adjusting entries.

Prepare adjusting entries to convert assets to expenses.

Prepare adjusting entries to convert liabilities to revenue.

Prepare adjusting entries to accrue unpaid expenses.

Prepare adjusting entries to accrue uncollected revenue.

Explain how the principles of realization and matching relate to adjusting entries.

Explain the concept of materiality.

Prepare an adjusted trial balance and describe its purpose.





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