Omissions of Adjustments in Accounting

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Many businesses use the accrual method of accounting to maintain their financial records. Accrual accounting allows the company to report the company’s position based on its activities rather than on transactions facilitated with cash. The company makes adjusting entries at the end of each period to bring revenue and expense balances up to date. When the company omits these entries, this impacts financial statements.

Adjustment Types

Adjusting entries fall into four categories. These include deferred expenses entries, accrued expenses, deferred revenues and accrued revenues. The company records deferred expenses and deferred revenues when it receives or makes payments for future activities. The company records accrued revenues and expenses when it provides for the customer and still needs to receive payment.

Omitting Deferred Revenue Entries

If a company omits a deferred revenue adjusting entry, both the income statement and balance sheet appear incorrect. For example, when the company receives a deposit from a customer, it increases the Unearned Revenue account by the amount of the deposit and increases Cash. Unearned Revenue represents a liability because the company owes a service to the customer. At the end of the month, the company evaluates how much of the service it provided and should record an adjusting deferral entry. This entry would increase Revenue and decrease Unearned Revenue. If the company omits the deferral adjusting entry, the revenue remains too low and the liability remains too high.

Omitting Accrued Revenue Entries

If a company omits an accrued revenue adjusting entry, both the income statement and balance sheet appear incorrect. For example, when the company provides a service to a client, it may not expect payment until after it bills the client in the following month. At the end of the month, the company evaluates how much of the service it provided and should record an adjusting accrual entry. This entry would increase Revenue and increase Accounts Receivable, an asset. If the company omits the accrual adjusting entry, the revenue remains too low and the assets remain too low.

Omitting Deferred Expense Entries

If a company omits a deferred expense adjusting entry, both the income statement and balance sheet appear incorrect. For example, when the company pays a deposit to a vendor, it increases the Prepaid Services account by the amount of the deposit and decreases Cash. Prepaid Services represents an asset because the vendor now owes a service to the company. At the end of the month, the company evaluates how much of the service it received and should record an adjusting deferral entry. This entry would increase the Expense account and decrease Prepaid Services. If the company omits the deferral adjusting entry, the expenses remain too low and the assets remain too high.

Omitting Accrued Expense Entries

If a company omits an accrued expense adjusting entry, both the income statement and balance sheet appear incorrect. For example, at the end of the month, the company knows it used the electricity all month even though the bill will not arrive until the following month. The company should evaluate how much of the electricity it used and record an adjusting accrual entry. This entry would increase the Utilities Expense account and decrease Accounts Payable. If the company omits the accrual adjusting entry, the revenue remains too high and the liabilities remain too low.

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