Friday, 2 November 2012

Accrued liabilities/assets vs unearned revenue/prepaid assets

  For the definitions and accounting for these accounts, the articles posted before this date on these topics needs to be reviewed


1. Accrued liability is an opposite counterpart of the accrued assets account. And the unearned revenue account is the opposite counterpart of the prepaid expenses account.

Accrued liability eg:

                     Expense     xxx
                     Accounts payable               xxx
(Cash payment is postponed, but expenses recorded)

When the cash is finally paid, the liability is reduced.

                     Accounts payable      xxx
                    Cash                                         xxx

Accrued Assets eg:

                      Accounts receivable   xxx
                      Revenue                                    xxx
(Cash is not received, but revenue is recognized)

When the cash is finally received, the asset is reduced.

                    Cash         xxx
                    Accounts receivable               xxx

Unearned revenue eg:

                      Cash       xxx
                      Extended Warranty Payable             xxx                                  

                      Cash       xxx
                      Advance Received            xxx

Unearned revenue is a liability. Though cash is received, the revenue is not recognized until the task required to earn the revenue is not complete. Since  this cannot be brought as a part of income untill it is recognized, it is capitalized as a liability in the balance sheet, and is amortised as an when the task gets complete.

                      Advance Recieved       xxx
                       Sale                                             xxx

                     Extended Warranty Payable      xxx
                      Extended Warranty Revenue                   xxx

But unfortunately if we cannot complete the task or in case an extended warranty claim actually has to be paid back, then this revenue is reversed with an expense.

                     Advance Recieved    xxx
                     Cash                                             xxx

                     Extended Warranty Payable      xxx
                     Cash                                                           xxx

Prepaid expense     eg:

                       Rent for 3yrs paid        xxx
                       Cash                                               xxx

We cannot recognise the expense for future years in the current year. But we have already paid for future years. So this is an asset (because technically we can get back the money if the expected task is not completed) and is capitalised as such in the balance sheet. This is also amortised as and when the task for which we have paid in advance gets completed

                      Rent expense for current year    yyy
                      Rent for 3yrs paid                                        yyy

And if we do not want the task to get completed and gets  our money back,
                      Cash               xxx
                       Rent for 3yrs paid                                        xxx

2. Accrued liability and unearned revenue are both liability accounts  whereas accrued assets and prepaid expenses are both asset accounts.

3. Accrued liability and accrued assets debits and credits an expense and a revenue account respectively, whereas unearned revenue and prepaid expenses debits and credits a cash account respectively.

4. Accrued liability and accrued asset account are reduced when the cash is paid and received respectively, whereas Unearned revenue and prepaid assets are reduced when the revenue and the expenses are finally recognised.

1 comment:

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