Question

Type 3 adjusting entries -- we've incurred an expense that we won't pay 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 pay cash.

Answer 1

Type 3 adjusting entries involve recognizing an expense in the current accounting period through debiting an expense account and crediting a liability account. When the cash is paid in a subsequent period, the follow-up entry debits the liability account and credits cash.

Step-by-step explanation:

Type 3 adjusting entries in accounting refer to situations where a company has incurred an expense but hasn’t paid it within the same accounting period. The construction of the adjusting entry requires recognizing the expense in the period it is incurred, regardless of when it is paid. The pattern for this entry typically involves debiting an expense account and crediting a liability account.

Adjusting Entry Pattern:

Debit: Expense Account (to record the incurred expense)

Credit: Liability Account (like Accrued Expenses or Accounts Payable, to acknowledge the obligation to pay in the future)

Follow-up Entry Pattern:

Debit: Liability Account (to reduce the amount owed)

Credit: Cash or Cash Equivalents Account (to record the actual payment)

This treatment aligns with the accrual basis of accounting, where expenses are matched with the revenues they help generate, regardless of the timing of cash flows. This ensures that the financial statements reflect the true economic activities of the business during a particular period.