Problem 20 - Accounting

Question

The balance in the unearned fees account, before adjustment at the end of the year, is \(\$ 27,600\). Of these fees, \(\$ 8,100\) have been earned. In addition, \(\$ 6,450\) of fees have been earned but have not been billed. Journalize the adjusting entries (a) to adjust the unearned fees account and (b) to record the accrued fees.

Step-by-Step Solution

Answer

Adjust unearned fees by debiting \(\$8,100\) and crediting \(\$8,100\) to Fees Earned. Record accrued fees by debiting \(\$6,450\) to Accounts Receivable and crediting \(\$6,450\) to Fees Earned.

Step 1: Adjusting Unearned Fees

The current balance in the unearned fees account is \(\\(27,600\), of which \(\\)8,100\) have been earned. To adjust this account, we need to recognize the earned portion as revenue. This means we need to debit the Unearned Fees account and credit the Fees Earned account by \(\\(8,100\). The journal entry will be: - **Debit** Unearned Fees: \(\\)8,100\)- **Credit** Fees Earned: \(\$8,100\)

Step 2: Recording Accrued Fees

In addition to the unearned fees, \(\\(6,450\) of fees have been earned but not yet billed, which need to be recorded as accrued fees. To do this, we need to accrue the revenue by debiting Accounts Receivable and crediting Fees Earned. The journal entry will be:- **Debit** Accounts Receivable: \(\\)6,450\)- **Credit** Fees Earned: \(\$6,450\)

Key Concepts

Unearned Fees

Unearned fees occur when a company receives payment for services or goods before actually delivering them. This is typically recorded as a liability on the balance sheet because it reflects an obligation to perform or deliver at some future point. For example, imagine a scenario where a company collect $27,600 in advance for services not yet provided. This amount stays in the unearned fees account until parts of the service are rendered.
Adjusting entries become vital when some of these fees are earned. In our exercise, $8,100 of the services have already been delivered. Thus, the company must remove this amount from the unearned fees account and recognize it as revenue. The journal entry involves debiting the unearned fees account to decrease the liability and crediting the fees earned account to recognize the revenue.

• Debit Unearned Fees: $8,100
• Credit Fees Earned: $8,100

This process ensures that financial statements accurately reflect the company's true financial situation.

Accrued Fees

Accrued fees represent revenues that have been earned but not received yet. Think of it as revenue recognized in the accounts, although money has not yet transferred hands. This situation commonly occurs when services have been performed, but the client has not been billed before the year-end financial statements preparation.
In the given exercise, $6,450 worth of services have been provided, and these must be recorded accordingly. To account for this, an adjusting entry must be made to reflect the earned but unbilled revenue. The entry requires debiting accounts receivable, which records the promise of future payment, and crediting the fees earned to acknowledge the service revenue.

• Debit Accounts Receivable: $6,450
• Credit Fees Earned: $6,450

This type of adjustment ensures that the revenues are matched to the period they are earned, even if cash hasn't been received yet.

Journal Entries

Journal entries are fundamental components of accounting used to record transactions in the financial records of a business. Each journal entry ensures that every financial transaction is accurately documented, maintaining the integrity of financial reporting. They typically involve debits and credits, with the total debits equaling total credits to uphold the accounting equation.
When dealing with adjusting entries, such as in our exercise, journal entries become crucial for recognizing events that have occurred but aren’t yet recorded. Adjusting entries, in particular, address revenues and expenses impacting previously recorded financial performance.
For our exercise, two essential adjusting entries were made involving unearned and accrued fees. The first involved moving revenue from an unearned category to an earned one to reflect services already performed. The second was recognizing earned but unbilled revenue using accounts receivable.

• Debit Unearned Fees and Credit Fees Earned to adjust the unearned fees.
• Debit Accounts Receivable and Credit Fees Earned to record accrued fees.

These entries help align financial statements with the period's actual economic activity, promoting accuracy and reliability.