Exploration · Ch 2 · Accounting for Accruals and Deferrals

Adjusting entries.

Every adjusting entry exists because cash timing and recognition timing don’t match. Pick one of the four scenarios below — each is one quadrant of the 2×2 — and watch the timeline, the horizontal statements model, and the period-end balance sheet all update together.

Pick a quadrant

Revenue

Expense

Cash before

Cash after

Scenario

Ohio Fitness sells a 12-month gym membership for $1,200 on Sept 1, Y1. The company delivers gym access over the next 12 months. The fiscal year ends Dec 31, Y1.

Timeline

Cash before service · period ends Dec 31

Dec 31 · Y1

Cash · Sept 1, Y1

Service ends · Aug 31, Y2

33% earned by Dec 31

Amount$1,200

Portion earned by Dec 3133%

Horizontal financial statements model

Every event on the four statements at once

		Assets		= Liab.	+ Equity	Income statement		Cash flow
Event	Date	Cash	—	Unearned Revenue	Ret. earn.	Rev.	Exp.	Amount
Receive cash for 12 months of service	Sept 1, Y1	+1,200	—		+1,200		—		—	—	+1,200OA
AdjAdjusting entry — recognize revenue earned	Dec 31, Y1	—	—		(400)		+400		+400	—	—
Recognize the rest as service is delivered in Y2	by Aug 31, Y2	—	—		(800)		+800		+800	—	—
Cumulative effect		+1,200	0		0		+1,200		+1,200	0	+1,200

Signed amounts — a positive number in an account increases it, a negative number decreases it. Debits and credits are not used in this model; the accounting equation still holds after every row (Assets = Liab. + Equity).

At period-end (Dec 31, Y1)

With vs. without the adjusting entry

Without adjusting entry

Balance sheet

Unearned Revenue (liability)

$1,200

Income statement (Y1)

Service Revenue

Liability overstated by $400 — revenue understated.

With adjusting entry

Balance sheet

Unearned Revenue (liability)

$800

Income statement (Y1)

Service Revenue

$400

$800 still unearned; $400 matches what was earned in Y1.

The pattern

When cash comes before the earning / consuming, the balance sheet holds a liability that drains into the income statement as time passes — a deferral. When cash comes after, the balance sheet accrues a receivable at period-end that clears when cash finally moves — an accrual. Every adjusting entry is one of those four moves.