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Adjusting Entries: Unearned Revenue (Cash Basis to Accrual Method)

Brian Krogol
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Alright. So let's start with the cash basis to a cruel method over here on the right. So I'm just gonna write that in here cash basis to a cruel, so remember from a cash basis, we earn our revenue when that cash is received, right? We received $1000 in cash. Hey, we're feeling good. We earned that revenue. So cash would go up 1000 right? We received 1000 in cash. But we're gonna directly credit our revenue. We're gonna say we earned all this revenue already from a cash basis, Right? And you can see why that's a little trickier when we think about it in the in the long term. So the idea here is that We've earned revenue of 1000, right? But from an accrual basis, we didn't earn all that revenue yet, right? We need to adjust that down to the correct amount. So the correct amount in this case is again going to be the same amount, the same logic that we used in our other sex, in the other section where we had $1,000 earned divided by the 20, gave us a $50 an hour rate, right? And we found out that there were 12 hours that we actually tutored them, right. The students still had eight hours of tutoring pre paid, they paid for 20. So that means they had to use up 12 of them. So what does that tell us? It tells us that our revenue should actually be this 600 right? The 600 which was the $50 an hour times the $12 used up or c 12 hours used up. That should be the amount of revenue we actually earned. But what does it say? Our revenue is right now. Our revenue is currently sitting at 1000 we need to bring it down to 600. Right? So since revenues go up with the credit, they go down with a debit. So we're going to debit revenue For 400 in this case, right? Because it was at 1000 and we need to bring it down to 600. So we're going to debit it by 400. That brings the revenue account to a credit balance of 600, which is what we want right? The amount we've earned. And what about this? 400? Well this is unearned revenue right? We got paid for this 400 but we haven't earned it yet. And that's that same 400 for those eight hours that are still not used up. Okay, so our revenue account is sitting at that 1000 minus the 400 which gets us to the correct balance of 600 in this case. And our unearned revenue, we didn't touch till sorry until here at the end Where we got a credit balance of 400. So notice in both cases on the left and the right, we got to the same final revenue and unearned revenue balances. Alright, let's go ahead and move on to the next video