Classify the following items as (a) deferred expense (prepaid expense), (b) deferred revenue (unearned revenue), (c) accrued expense (accrued liability), or (d) accrued revenue (accrued asset).
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• 2. A three-year premium paid on a fire insurance policy.
• 3. Fees received but not yet earned.
• 4. Fees earned but not yet received.
• 5. Utilities owed but not yet paid.
• 6. Supplies on hand.
• 7. Salary owed but not yet paid.
• 8. Taxes owed but payable in the following period.
To classify the items as deferred expense, deferred revenue, accrued expense, or accrued revenue, we need to understand the definitions of each term.
(a) Deferred expense (prepaid expense): This refers to an expense that has been paid in advance but has not yet been incurred or used. It is considered an asset because the prepaid amount will be gradually consumed over time.
(b) Deferred revenue (unearned revenue): This refers to revenue that has been received in advance but has not yet been earned. It is considered a liability because the company owes the goods or services to the customer.
(c) Accrued expense (accrued liability): This refers to an expense that has been incurred but has not yet been paid or recorded. It is considered a liability because the company owes payment for the expense.
(d) Accrued revenue (accrued asset): This refers to revenue that has been earned but has not yet been received or recorded. It is considered an asset since the company has a right to receive payment for the goods or services provided.
Now let's classify the items:
1. A three-year premium paid on a fire insurance policy.
- This is a deferred expense (prepaid expense) because the premium has been paid in advance but will be gradually consumed (recognized as an expense) over the three-year period.
2. Fees received but not yet earned.
- This is a deferred revenue (unearned revenue) since the fees have been received in advance but the services have not been provided yet.
3. Fees earned but not yet received.
- This is an accrued revenue (accrued asset) because the fees have been earned but not yet received or recorded.
4. Utilities owed but not yet paid.
- This is an accrued expense (accrued liability) since the utilities have been used (incurred) but have not yet been paid or recorded.
5. Supplies on hand.
- This is not specifically classified in the given options. However, supplies on hand would generally be categorized as an asset.
6. Salary owed but not yet paid.
- This is an accrued expense (accrued liability) because the salary has been earned by the employee but has not yet been paid or recorded by the company.
7. Taxes owed but payable in the following period.
- This is an accrued expense (accrued liability) because the taxes have been incurred but are not yet paid, and the payment will be made in the following period.
In summary:
- (a) A three-year premium paid on a fire insurance policy is a deferred expense (prepaid expense).
- (b) Fees received but not yet earned is a deferred revenue (unearned revenue).
- (c) Fees earned but not yet received is an accrued revenue (accrued asset).
- (d) Utilities owed but not yet paid is an accrued expense (accrued liability).
- The remaining items, such as supplies on hand, cannot be specifically classified based on the given options.