Final answer:
Adjusting entries for accrued expenses involve debiting the expense account and crediting a liability account, whereas accrued revenues involve debiting an asset account like 'Accounts Receivable' and crediting a revenue account to accurately reflect earned income and incurred expenses that have not yet been transacted in cash. The correct option is 2.
Step-by-step explanation:
To describe the adjusting entries for accrued expenses and accrued revenues, we'll look at the accounts involved in each type of adjustment.
Accrued expenses are expenses that have been incurred but not yet paid. The adjusting entry for accrued expenses involves two accounts: an expense account and a liability account.
When making the entry, you would debit the appropriate expense account to reflect the incurred expense and credit a liability account, often called 'Accrued Expenses' or 'Accrued Liabilities,' to record the obligation to pay in the future.
Accrued revenues are revenues for services performed or goods sold but not yet billed or received. To record an adjusting entry for accrued revenues, you debit an asset account called 'Accounts Receivable' to reflect the amount owed by the customer, and credit a revenue account to record the earned income.
In summary, for accrued expenses, you adjust by debiting expense and crediting a liability account, while for accrued revenues, you debit an asset account and credit a revenue account. The correct option is 2.