- A prepaid expense is an advanced payment a company has made regarding an expense account to cover multiple accounting periods. At the time of the transaction, cash is disbursed and credited, and an account of prepaid expense is created and debited. However, a prepaid expense is not an expense account but rather an asset account, because the total balance in the prepaid expense account doesn't pertain to any particular period and is allocated over time to multiple periods. By the end of an accounting period, a company will have incurred a certain amount of expense out of the total expense prepaid for the current period. Therefore, an adjusting entry must be made to increase the expense account with a debit and decrease the prepaid expense account with a credit.
- An unearned revenue is a form of pre-received sales proceeds from customers for future product or service deliveries. Companies cannot record the total proceeds received as revenues when they have yet to be earned over multiple accounting periods. At the time of the transaction, cash is received and debited, and an account of unearned revenue is created and credited. Unearned revenue is not a revenue account but rather a liability account in that a company is obligated to complete future deliveries. By the end of an accounting period, based on the amount of completed deliveries, a company will have earned certain amount of revenue out of the total unearned revenue for the current period. Therefore, an adjusting entry must be made to increase the revenue account with a credit and decrease the unearned revenue account with debit.
- An accrued revenue is a revenue earned but not yet received in cash or invoiced and recorded. Certain revenues may accrue, or accumulate, with the passing of time, such as interest revenue, without the presence of a transactional event. Other revenues may have been earned over time as a result of product deliveries or service performing, but not billed for collection. Without a transaction to trace to or an invoice to base on, companies usually don't make journal entries on accrued revenues during an accounting period. At the end of an accounting period, however, companies make necessary adjustments on any accrued revenues by increasing both the revenue account with a credit and an asset account of accounts receivable with a debit.
- An accrued expense is an expense incurred but yet paid or billed and recorded. Accrued expenses result from the same causes as accrued revenues. Examples of accrued expenses include accrued interest expense on borrowings and trade payables of any expense credit extended by suppliers. Similarly to the case of accrued revenues, companies usually don't make journal entries during an accounting period on accrued expenses because of the lack of any trigger by a transaction or the support of a billing document. But at the end of an accounting period, companies make relevant adjusting entries to reflect any expenses incurred by increasing both the expense account with a debit and an liability account of accounts payable with a credit.
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