Why is it necessary to make adjusting entries for accrued revenues at the end of the accounting period?

• A. To record cash received in advance for future services as revenue immediately.
• B. To recognize revenues that have been earned but not yet recorded, ensuring compliance with the revenue recognition principle.
• C. To decrease total assets and liabilities on the balance sheet.
• D. To reverse previously recorded revenue transactions that were made in error.

Answer: (B)

Verified step by step guidance

1. Understand the concept of accrued revenues: Accrued revenues are revenues that have been earned during the accounting period but have not yet been recorded because the cash has not been received. This is important for compliance with the revenue recognition principle, which states that revenue should be recognized when it is earned, not necessarily when cash is received.
2. Review the purpose of adjusting entries: Adjusting entries are made at the end of the accounting period to ensure that all revenues and expenses are properly recorded in the correct period. This helps maintain accurate financial statements and ensures compliance with accounting principles.
3. Identify the impact on financial statements: Without adjusting entries for accrued revenues, the income statement would understate revenues, and the balance sheet would understate assets (e.g., accounts receivable). Adjusting entries correct these inaccuracies.
4. Determine the journal entry for accrued revenues: The adjusting entry typically involves debiting an asset account (e.g., Accounts Receivable) to recognize the amount owed and crediting a revenue account to record the earned revenue.
5. Ensure compliance with the revenue recognition principle: Making adjusting entries for accrued revenues ensures that the financial statements reflect the revenues earned during the period, regardless of whether cash has been received, aligning with the revenue recognition principle.