Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 3 Accrual Accounting Concepts 107

Exhibit 1 summarizes the nature of deferrals and accruals and the need for ad-

justments in order to prepare financial statements.

Adjustments for Family Health Care

We now analyze the accounts for Family Health Care at the end of November to

determine whether any adjustments are necessary. Specifically, we will focus on the

following adjustment data, which are typical for most businesses.

Deferred expenses:

1. Prepaid insurance expired, $1,100.


2. Supplies used, $150.


3. Depreciation on office equipment, $160.

Deferred revenue:

4. Unearned revenue earned, $360.

Accrued expense:

5. Wages owed but not paid to employees, $220.
   Accrued revenue:


6. Services provided but not billed to insurance companies, $750.

Adjustment 1 (Prepaid Insurance). This first adjustment recognizes that a portion

of the prepaid insurance purchased November 1 expired during November. Family

Health Care prepaid two policies—a general business policy for $2,400 (transaction b)

and a malpractice policy for $6,000 (transaction c). The general business policy is a two-

year policy expiring at a rate of $100 ($2,400 24) per month. The malpractice policy

is a six-month policy that expires at a rate of $1,000 ($6,000 6) per month. The total

expired prepaid insurance is thus $1,100 ($100 $1,000). This adjustment is recorded

as shown on the next page.

Cash received or paid

Revenue earned or

expense incurred

Cash received or paid

Revenue earned or

expense incurred

Deferrals

Accruals

Current

Accounting Period

Future

Accounting Period

JAN. 1

2008

DEC. 31

2008

JAN. 1

2007

DEC. 31

2007

Exhibit 1

Deferrals and Accruals