How Adjusting Entries Impact Revenue Recognition in Accounting
What type of adjusting entry is made when a company completes services but hasn't received payment yet?
The company completes $18,000 worth of services for a client on December 19, but doesn't send the invoice until January 6. The client pays the invoice on January 11. What type of adjusting entry is this?
Final answer:
The type of adjusting entry in this scenario is the recognition of revenue earned but not yet received. The three journal entries required are:
- On December 19: Debit Accounts Receivable $18,000, Credit Revenue $18,000
- On January 6: Debit Accounts Receivable $18,000, Credit Revenue $18,000
- On January 11: Debit Cash $18,000, Credit Accounts Receivable $18,000
In this scenario, when Bigfoot Tax Services completes $18,000 worth of services for their client but hasn't received payment yet, it requires an adjusting entry to recognize the revenue earned but not yet received.
The first journal entry on December 19 records the revenue earned:
- Debit: Accounts Receivable $18,000
- Credit: Revenue $18,000
The second journal entry on January 6 removes the accounts receivable balance:
- Debit: Accounts Receivable $18,000
- Credit: Revenue $18,000
The third journal entry on January 11 records the payment received:
- Debit: Cash $18,000
- Credit: Accounts Receivable $18,000
These entries reflect the process of recognizing revenue earned, sending out the invoice, and receiving payment from the client.