ACF5950 · Introduction to Financial Accounting
Accrual Accounting and Adjusting Entries
Week 4 contrasts accrual and cash accounting — accrual recognises revenue when earned and expenses when incurred, regardless of cash timing (CF 1.17) — and appraises their relative merits (learning outcome 2). You prepare the four classes of period-end adjusting entries (accrued revenue, accrued expense, prepayment, unearned revenue) plus depreciation, then produce an adjusted trial balance. Every adjusting entry touches one income-statement and one balance-sheet account and never cash, and getting them right is decisive for statement preparation and a recurring source of exam marks. The week shown is the unit's standard arc — confirm the exact teaching week on Moodle / the unit outline.
What this chapter covers
- 01Accrual vs cash accounting and appraising their relative merits (LO2)
- 02The revenue recognition principle (revenue when earned / the performance obligation is satisfied)
- 03Expense recognition / matching expenses to the period they help earn revenue
- 04The period assumption dividing the entity's life into reporting periods
- 05The four classes of adjusting entry: accrued revenue, accrued expense, prepaid (deferred) expense, unearned (deferred) revenue
- 06Depreciation as an adjusting entry: Dr Depreciation expense, Cr Accumulated depreciation (contra-asset); carrying amount = cost − accumulated depreciation
- 07Preparing the adjusted trial balance as the basis for the financial statements
The four adjusting entries plus depreciation
- +1Prepaid expense: insurance used = 2,400 ÷ 12 × 3 = 600. Adjusting entry Dr Insurance expense 600 / Cr Prepaid insurance 600 — the asset is consumed into an expense.
- +1Accrued expense: wages incurred but unpaid. Dr Wages expense 1,500 / Cr Wages payable 1,500 — recognise the expense and the liability now, before cash moves.
- +1Unearned revenue: one of three jobs done, so 9,000 ÷ 3 = 3,000 is now earned. Dr Unearned revenue (liability) 3,000 / Cr Service revenue 3,000 — reduce the liability, recognise the revenue.
- +1Depreciation: annual = (24,000 − 0) ÷ 8 = 3,000. Dr Depreciation expense 3,000 / Cr Accumulated depreciation 3,000 (a contra-asset); carrying amount becomes 24,000 − 3,000 = 21,000.
Key terms
- Accrual basis
- Recognising revenue when earned and expenses when incurred, regardless of when cash is received or paid (CF 1.17); gives a more faithful picture of performance than the cash basis.
- Cash basis
- Recognising revenue and expenses only when cash is received or paid. Simpler and shows liquidity, but can mislead about profitability; not used for general-purpose financial statements.
- Adjusting entry
- A period-end journal entry that updates accounts to the accrual basis; each affects one income-statement and one balance-sheet account and never cash.
- Accrued expense
- An expense incurred but not yet paid or recorded; adjusted by Dr Expense / Cr Payable (a liability).
- Prepaid (deferred) expense
- Cash paid in advance for a future benefit, held as an asset and expensed as consumed; adjusted by Dr Expense / Cr Prepaid asset.
- Unearned (deferred) revenue
- Cash received before the service is performed, recorded as a liability and recognised as revenue when earned; adjusted by Dr Unearned revenue / Cr Revenue.
Accrual Accounting and Adjusting Entries FAQ
What is the difference between accrual and cash accounting?
Accrual accounting recognises revenue when it is earned and expenses when they are incurred, regardless of cash movement (CF 1.17), so profit reflects performance for the period. Cash accounting records only when cash is received or paid. Accrual gives a more faithful picture of performance and position and is required for general-purpose financial statements; cash accounting is simpler and highlights liquidity but can mislead about profitability.
Why does an adjusting entry never touch cash?
Because the cash effect has either already been recorded (a prepayment or unearned revenue was recorded when cash moved) or has not yet happened (an accrual is recognised before cash moves). The adjusting entry only re-times the revenue or expense into the correct period, so it pairs an income-statement account with a balance-sheet asset or liability — if it debits or credits Cash, it is a normal transaction, not an adjustment.
What are the four types of adjusting entry?
Accrued revenue (earned, not yet received: Dr Receivable / Cr Revenue); accrued expense (incurred, not yet paid: Dr Expense / Cr Payable); prepaid expense (paid in advance, consumed over time: Dr Expense / Cr Prepaid asset); and unearned revenue (received in advance, earned over time: Dr Unearned revenue / Cr Revenue). Depreciation is a further period-end adjustment allocating an asset's cost.
Can AI help me with adjusting entries in ACF5950?
Yes. Sia can classify a scenario into the right adjustment type, show the debit and credit, and check that the entry hits one income-statement and one balance-sheet account without touching cash. It is a study aid for understanding and rehearsal, not for graded work — confirm the AI policy for each assessment on Moodle, as Monash academic-integrity rules apply.
Exam move
Learn to classify before you journalise: read each scenario and label it accrued revenue, accrued expense, prepayment, unearned revenue or depreciation, then write the entry and confirm it touches one income-statement account, one balance-sheet account and never cash. Practise computing the portion earned or consumed (a prepayment expensed by months elapsed, unearned revenue earned by jobs completed), because a wrong fraction flows straight into the statements. Rehearse building the adjusted trial balance from an unadjusted one, since that is the launch pad for Week-6 statement preparation. Adjusting entries are consistently examined and easy to get directionally wrong, so drill the direction of each deferral and accrual until it is second nature ahead of the hurdle exam.
Working through Accrual Accounting and Adjusting Entries in ACF5950? Sia is AskSia’s AI Business and Economics tutor — ask any ACF5950 Accrual Accounting and Adjusting Entries question and get a clear, step-by-step explanation grounded in how ACF5950 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
