Corporationreported over $300 million of prepaid expenses and other current as-
sets on a recent balance sheet.- Unearned revenues ordeferred revenuesare items that initially have been recorded
as liabilities but are expected to become revenues over time or through the normal
operations of the business. For Family Health Care, unearned rent is an example of
a deferred revenue. Other examples include tuition received in advance by a school,
an annual retainer fee received by an attorney, premiums received in advance by an
insurance company, and magazine subscriptions received in advance by a publisher.
On a recent balance sheet, Microsoft Corporationreported almost $5 billion of de-
ferred revenue related to its software. Likewise, Time-Warner Inc.reported over a
billion dollars of deferred revenue on a recent balance sheet.
Accrualsare created when a revenue or expense has been earned or incurred, but
has not been recorded at the end of the accounting period. Accruals are normally the
result of revenue being earned or an expense being incurred before any cash is re-
ceived or paid. One such situation where employees earn wages before the end of
the year, but are not paid until after year-end. For example, employee wages may be
paid and recorded every Friday, but the accounting period may end on a Tuesday.
Thus, at the end of the accounting period, the company owes the employees for their
wages on Monday and Tuesday that will be paid on the following Friday. At the end
of the accounting period, these wages have been incurred by the company, but have
not yet been recorded or paid. Thus, the amount of the wages for Monday and Tuesday
is an accrual. Other examples of accruals are described below.- Accrued expensesor accrued liabilities are expenses that have been incurred but
have not been recorded in the accounts. An example of an accrued expense is accrued
interest on notes payable at the end of a period. Other examples include accrued util-
ity expenses and taxes. On a recent balance sheet, Home Depotreported over $600
million of accrued salaries and related expenses and over a billion dollars of other
accrued expenses. - Accrued revenuesor accrued assets are revenues that have been earned but have
not been recorded in the accounts. An example of an accrued revenue is fees for
services that an attorney has provided but has not billed to the client at the end of
the period. Other examples include accrued interest on notes receivable and ac-
crued rent on property rented to others. In notes to a recent balance sheet, General
Motorsreported over $1 billion of accrued interest and rent receivables.
106 Chapter 3 Accrual Accounting Concepts
Dave’s Legacy
When Dave Thomas, founder of Wendy’s, died in 2002, he
left behind a corporate culture of integrity and high ethical
conduct. When asked to comment on Dave’s death, Jack
Schuessler, chairman and chief executive officer of Wendy’s,
stated:
“... people (could) relate to Dave, that he was honest and
has integrity and he really cares about people.... there is no
replacing Dave Thomas .... So you are left with... the values
that he gave us... and you take care of the customer every
day like Dave would want us to and good things will happen.”
“... he’s (Dave Thomas) taught us so much that when we
get stuck, we can always look back and ask ourselves, how
would Dave handle it?”In a recent discussion of corporate earnings
with analysts, Kerrii Anderson, chief financial of-
ficer of Wendy’s, stated: “... we’re confident
about the future and because of our unwavering
commitment to our core values, such as quality
food, superior restaurant operations, continuous
improvement, and integrity to doing the right
thing(emphasis added).”Sources:Neil Cavuto, “Wendy’s CEO—Interview,” Fox News:
Your World, February 11, 2002; “Q1 2003 Wendy’s International
Earnings Conference Call—Final,” Financial Disclosure Wire, April
24, 2003.INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS
Q.Assume that you take
advantage of an offer by
a local funeral home to
prepay your funeral, bur-
ial, and related expenses.
How would the funeral
home account for the pre-
payment?A.Increase cash and de-
ferred (unearned) revenue.