LOS d: Explain the need for accruals and other adjustments in preparing financial statements.

Accruals fall into four categories:
1. Unearned revenue.
2. Accrued revenue.
3. Prepaid expenses.
4. Accrued expenses. Wages payable are a common example of an accrued expense.

Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.

 

Accruals require an accounting entry when the earliest event occurs (paying or receiving cash, providing a good or service, or incurring an expense) and one or more offsetting entries as the exchange is completed.

In some cases, accounting standards require balance sheet values of certain assets to reflect their current market values. Accounting entries that update these assets’ values from their historical cost are called valuation adjustments. To keep the accounting equation in balance, changes in asset values are also changes in owners’ equity, through gains or losses on the income statement or in “other comprehensive income.”