Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 4 - Accrual Accounting Concepts - Questions - Page 200: 12

Answer

Adjustment is done to reduce an overstated liability and understated revenue that occurs due to the unearned revenue. In order to do so, liabilities are debited and revenue is credited.

Work Step by Step

Unearned revenue refers to the fact that payment has occurred before revenue has been earned. The money from this is put into a liability account. As the period progresses, the company will provide the service and earn a revenue and reduce its liability (the unearned revenue. Since it is impractical to constantly calculate the amount of revenue gained on a daily basis, this is done towards the end of the accounting period and results in the correction of a pre-adjustment overstated liability and understated revenue. Hence we find that liabilities are debited (decreased) and revenue is credited (increased).
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