Question

Type 4 adjusting entries -- we've earned revenue, but we won't receive payment until a later accounting period

Give the pattern of the adjusting entry.

Give the pattern (i.e., what is debited? what is credited?) of the follow-up entry when we receive the cash.

Answer 1

A Type 4 adjusting entry for earned revenue not yet received involves debiting Accounts Receivable and crediting Revenue. Later, when cash is received, Cash is debited and Accounts Receivable is credited to settle the receivable.

Step-by-step explanation:

When a company has earned revenue but will not receive payment until a later accounting period, a Type 4 adjusting entry is needed. The pattern for the adjusting entry is a debit to Accounts Receivable and a credit to Revenue. This reflects the earned income that is yet to be received. Here is the step-by-step pattern:

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• Debit Accounts Receivable (asset increases, representing money to be received)
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• Credit Revenue (revenue increases, recognizing the earned income)

Follow-up Entry When Receiving Cash

When the cash is later received, the follow-up entry would involve the following steps:

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• Debit Cash (asset increases with the cash receipt)
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• Credit Accounts Receivable (asset decreases as the previously recorded receivable is settled)

These entries are crucial to ensure that revenues are reported in the correct accounting period, aligning with the accrual basis of accounting principles.