Which of these transactions requires an adjusting entry (debit) to Unearned Revenue? A. revenue

step 1 Okay, so we are going to understand the golden rules of accounting. Okay, so these rules of acco

Which of these transactions requires an adjusting entry...

Key Concepts

Accrual Basis Accounting

Accrual basis accounting is a method where revenue and expenses are recorded when they are earned or incurred, not when cash is exchanged. This ensures that financial statements provide a consistent and accurate representation of a company's financial position by matching revenues with corresponding expenses in the period they occur.

Revenue Recognition Principle

The revenue recognition principle is a guideline that dictates when revenue should be recorded in the accounting records. Under this principle, revenue is recognized when it is earned, irrespective of when the related cash is received, ensuring that financial statements accurately reflect economic activities during a specific period.

Unearned Revenue

Unearned revenue refers to funds received from customers for goods or services that have not yet been provided or performed. Initially recorded as a liability, this account is reduced and corresponding revenue is recognized through an adjusting entry once the revenue is actually earned.

Adjusting Entries

Adjusting entries are journal entries made at the end of an accounting period to allocate income and expenses to the appropriate period. These entries are essential for ensuring that the financial records comply with the accrual basis of accounting, thereby properly matching revenues with related expenses.

Transcript

00:01 Okay, so we are going to understand the golden rules of accounting.

00:05 Okay, so these rules of accounting will be applicable throughout the accounting as a subject.

00:17 Okay, so first of all, however, after writing, it will be easy to understand.

00:29 And there is also one more thing that there is no a very substantial logic behind that why these are rules framed like this and why not that's like.

00:42 Okay.

00:44 So, do not have such confusion, okay? just take a note of that and when you will practice more, you will get hand of it, okay? so increase in expenses and assets, we will give a debit to them.

01:06 In case of decrease in expenses and assets, they will give a credit to them.

01:15 So these are simple rules.

01:17 Like whenever they will be increasing expense like whenever the business entity will you know incur such expenses or purchases some assets then those accounts will be debited and they will be credit for corresponding reduction in expenses and assets account so rule two so there are five types of accounts mainly first one is assets then second is expenses so increase in liability capital and revenue there is a corresponding credit whereas in case of reduction in liability capital and revenue accounts there is a corresponding debit okay so the first rule of second so the second rule states that increase in liability capital and revenue account will have a credit entry first and corresponding entry to debit however these we will understand later okay so let's take an example to understand the situation let's suppose there is mr a okay who is the owner of what owner of business of furniture okay now what happens there is a second also person okay there is a second person mr b so what happened so mr b frequently purchases furniture products from mr a like chairs tables okay all sort of products and mr b said okay i will pay you advance money okay i will pay you advance money in this in this financial year and you can deliver the goods like chairs and tables in next financial year so advanced money has been received in financial year one okay but delivery will happen in financial year two okay now what happens when this so there are two separate transaction first one in first one is received of advanced money and second one is delivery will happen so so in current in financial year one then this advanced money has been received we will not recognize the value of goods and services as income in books of accounts of pay okay but when delivery will happen in next financial year that amount which has been recorded in financial year one there will be an adjustment entry to record the income in financial year 2 okay so to convert the amount that has been recorded in financial year 1 into income of financial year 2 there will be adjustment entry okay so in that case so the adjustment entry will include or we can say it will state a debit to liability account how let's understand okay so let's understand it first that if mr.

05:24 A has received advance money from mr b so there increases a liability of mr a towards mr b of what of delivery of chairs and tables to mr b okay so there increase a liability and what we have said if there is an increase in liability they will give a we will give a credit to them okay now in case of adjusting entry when we will convert the advance money into income of financial year 2 because whenever the delivery will be made the revenue or the advance money that has been received in financial year 1 okay will be recognized as income in second financial year based on the delivery made by mr.

06:16 A to mr.

06:17 B okay now in that case if there is adjustment entry so there will be a corresponding debit to the same account which had the credit in first instance.

06:32 Okay...

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