Final answer:
The accounts affected in the adjusting entry are 'Unearned Revenue' and 'Revenue'. A debit of $400 is made to 'Unearned Revenue' and a credit of $400 to 'Revenue' to reflect the redemption of the gift certificates and the earning of revenue as the decorating services are provided.
Step-by-step explanation:
The question relates to accounting and how to handle the redemption of gift certificates sold by the company. When a company sells gift certificates, it records the sale as a liability because it owes a service in the future.
The sale of $500 in gift certificates should be recorded as an increase in 'Unearned Revenue' (a liability account) and an increase in 'Cash' (an asset account) by $500.
When the company redeems $400 worth of gift certificates, the accountant needs to recognize that part of the liability has been satisfied by providing the decorating services.
The adjusting entry would decrease 'Unearned Revenue' and increase 'Revenue' by $400. This reflects the earning of revenue as services are rendered. The entry on December 31 would be:
- Debit Unearned Revenue: $400
- Credit Revenue: $400
This adjusting entry reflects the matching principle, ensuring that revenues are recognized in the period the services are provided.