Chapter 3, Problem 3.32E

 (1)

To determine

Adjusting entries

Adjusting entries are those entries which are made at the end of the accounting period, to record the revenues in the period of which they have been earned and to record the expenses in the period of which have been incurred, as well as to update all the balances of assets and liabilities accounts on the balance sheet, and to ascertain accurate amount of net income (loss) on the income statement to maintain the records according to the accrual basis principle.

Accounting rules for journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Deferred revenues:

Collection of cash in advance to render service or to deliver goods in future is known as unearned revenues. These unearned revenues are considered as liabilities until they are earned. For the portion of rendered services or delivered goods, revenues would be recognized by way of passing an adjusting entry. Unearned revenue is also known as deferred revenues, because at the receiving of payment in advance, revenues are not recognized but deferred until they are earned.

To prepare: Adjusting entry by assuming that Company M has records the cash receipt of unearned revenue by initially crediting a liability account.

 (2)

To determine

To prepare: Adjusting entry by assuming that Company M has records the cash receipt of unearned revenue by initially crediting a revenue account.

(3)

To determine

To compare: The ending balance of both Unearned Revenue Account and Service Revenue Account prepared under both approaches, and determine whether they are same.