Financial Accounting Basics: Part 1 – Getting Started
Financial Accounting Basics: Part 2 – Double Entry Accounting
Financial Accounting Basics: Part 3 – Post to the General Ledger
Financial Accounting Basics: Part 4 – Unadjusted Trial Balance
Financial Accounting Basics: Part 5 – Posting Adjusting Entries
Financial Accounting Basics: Part 6 – Adjusted Trial Balance
Financial Accounting Basics: Part 7 – Creating Financial Statements
Financial Accounting Basics: Part 8 – Post Closing Entries
This article is an introduction to building the Adjusted Trial Balance so that deferred revenue is accounted for.
In Part 5 we created an adjusted trial balance by reversing two out of the twelve months of your subscription revenue, which is $5,000, and temporarily holding it as a liability in an account called deferred revenue or unearned revenue. This is a liability account because you still have an obligation at the end of the year to provide your customers with BIG News from January to February. Let’s post this one to your general ledger and then we can run a new adjusted trial balance.
So, our old unadjusted trial balance is:
Now it is adjusted because you have posted your adjusting entries.
We can see that your subscription revenue has gone down $5,000 and your liabilities have gone up $5,000. Your debit and credit totals still match each other because there are two equal and opposite sides to the journal and now you are playing by the rules because you are following the accrual method of accounting.
So now it becomes a new adjusted trial balance:
Congratulations you now understand the foundation of financial accounting. Get ready for the next big step in Part 7 where we begin to create your financial statements.