Cash basis vs. accrual basis — what's the difference?

Cash basis records revenue and expenses only when cash moves. Accrual basis records revenue when EARNED and expenses when INCURRED, regardless of cash. GAAP uses accrual.

What is the revenue recognition principle?

Record revenue in the period it is earned — when the service is performed or goods are delivered — not necessarily when cash is received.

What is the expense recognition (matching) principle?

Record expenses in the same period as the revenues they helped earn, so profit is measured fairly.

Why are adjusting entries needed?

At period end some revenues are earned and some expenses incurred that haven't been recorded yet. Adjustments update the accounts so the statements are accurate.

What two kinds of accounts does every adjusting entry touch — and which is never involved?

Exactly one income-statement account (a revenue or expense) and one balance-sheet account (an asset or liability). Cash is never part of an adjusting entry.

Deferrals vs. accruals — what's the split?

Deferrals: cash already moved, so part of a recorded asset or liability now belongs to this period. Accruals: cash hasn't moved yet — the revenue or expense happened first.

Name the four adjusting-entry patterns.

Deferrals: (1) prepaid expenses and (2) unearned revenues. Accruals: (3) accrued revenues and (4) accrued expenses.

Adjusting entry for a prepaid expense being used up?

Debit the Expense, credit the Asset (e.g., Debit Supplies Expense, Credit Supplies). The used-up asset becomes an expense.

Supplies began at $4,000; $1,500 remain at period end. Adjusting entry?

Used = 4,000 − 1,500 = 2,500. Debit Supplies Expense 2,500; Credit Supplies 2,500.

What is depreciation?

Spreading the cost of a long-lived asset (equipment, vehicles, buildings) across the periods it is used — a prepaid expense stretched over years.

Depreciation adjusting entry?

Debit Depreciation Expense; Credit Accumulated Depreciation (a contra-asset). Cash is not touched.

What is Accumulated Depreciation, and what is book value?

A contra-asset that totals all depreciation taken so far. Book (carrying) value = original cost − accumulated depreciation.

Equipment costs $24,000, 5-year life, no salvage. Annual depreciation and year-1 book value?

Straight-line: 24,000 ÷ 5 = $4,800 per year. Book value after year 1 = 24,000 − 4,800 = $19,200.

Adjusting entry when unearned revenue becomes earned?

Debit Unearned Revenue (liability down); Credit Service Revenue (earned now).

Collected $6,000 for 6 months of service; 2 months done. Adjusting entry?

Earned = 6,000 × 2/6 = 2,000. Debit Unearned Revenue 2,000; Credit Service Revenue 2,000.

What is an accrued revenue, and its adjusting entry?

Revenue earned but not yet recorded or received. Debit Accounts Receivable; Credit Service Revenue.

What is an accrued expense, and its adjusting entry?

An expense incurred but not yet paid or recorded. Debit the Expense; Credit a Payable (e.g., Salaries and Wages Payable).

How do you compute accrued interest?

Interest = Principal × Rate × Time. Example: $20,000 × 6% × 3/12 = $300. Entry: Debit Interest Expense; Credit Interest Payable.

What is the adjusted trial balance?

A trial balance prepared after all adjusting entries are posted. It shows true period-end balances and is the basis for the financial statements.

What happens if you omit the adjustment for an accrued revenue?

Revenue and assets are both understated — the business looks like it earned less than it did, and net income is too low.

Back to Courses

Accounting 1 · Chapter 3 · Free

Chapter 3 — Adjusting Entries

The four adjusting-entry patterns that get the books right at period end — accruals, deferrals, and more.

Quiz Generator Practice Hub

What you'll learn

Explain why adjusting entries are needed under accrual accounting
Prepare the four types of adjusting entries (deferrals and accruals)
Build an adjusted trial balance

Lecture

Full lecture

Quick Review

Short recaps for fast review

Exam Cram — All of Chapter 3 in 13 Minutes

Practice this chapter

Test what stuck

1 page

Printable

Printable worksheet (PDF-free)

Every exercise on one page. Print it, do it on paper, then check yourself.

Open worksheet

Any chapters

Custom quiz

Build a custom quiz

Pick any chapters, choose the size, and we'll grade it — great for cumulative revision.

Build a custom quiz

Chapter downloads

Cheat card — 1 page Download

How to get the most out of this chapter

Watch the lecture above (or bookmark this page for when it goes live).
Take the Quick Quiz to test what stuck.
Work through the interactive practice exercises — check your answers and reveal the worked solution when you get stuck.
Run through the flashcards to lock in the key terms.
Sit the interactive mock exam end-to-end — no feedback until you submit.
Use the Quick Review / Exam Cram videos to lock it in before moving on.
When you're ready, move on to the Chapter 4.

Get new chapters in your inbox →

Chapter 3 — Adjusting Entries

Full lecture

Short recaps for fast review

Test what stuck

Quick Quiz

Worked Exercises

Mock Exam

Flashcards

One-page summary

Printable worksheet (PDF-free)

Build a custom quiz