Chapter 5
The Accounting Cycle: Adjustments
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April and May. Raina makes adjustments to its accounting records at the end of each month
because it produces financial statements internally on a monthly basis.
In Raina’s books, on March 1 when the payment is received, Raina will increase cash (an asset) by
$6,600 and increase unearned revenue (a liability) by $6,600.This is shown in Figure 5.9.
As of March 31, Raina has earned one month of revenue. On this date, the company will decrease
unearned revenue (a liability) by $2,200 and increase owner’s equity by $2,200 with an increase to
rent revenue (an income statement account). After this adjustment is made on March 31, Figure
5.10 shows that Raina still owes $4,400 worth of rent to the tenant.
UNEARNED REVENUE
RENT REVENUE
-
-
+
+
2,200 6,600
4,400
Adjustment
2,200
journal
Page 1
date
2016
account title and explanation Pr debit credit
Mar 31 Unearned Revenue
2,200
Rent Revenue
2,200
To adjust for 1 month rent earned
______________
FIGURE 5.10
The same adjustment will be made on April 30 (to recognize April’s rent revenue) and May 31
(to recognize May’s rent revenue). Figure 5.11 shows the timing of the transactions related to
unearned revenue.
BALANCE SHEET
LIABILITIES
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
BANK LOAN
INCOME STATEMENT
EXPENSES
SERVICE REVENUE
DEPRECIATION
INTEREST
SALARIES
RENT
No change in owner’s equity
ASSETS
CASH
OFFICE
SUPPLIES
ACCOUNTS
RECEIVABLE
+$6,600 CR
+$6,600 DR
journal
Page 1
date
2016
account title and explanation Pr debit credit
Mar 1 Cash
6,600
Unearned Revenue
6,600
Receive cash for 3 months rent
____________
FIGURE 5.9
