At the end of the current year, $19,900 of fees have been earned but not billed to clients.
a.What is the adjustment to record the accrued fees? Indicate each account affected, whether the account is increased or decreased, and the amount of the increase or decrease.
b.If the cash basis rather than the accrual basis had been used, would an adjustment have been necessary? Explain.
a. To record the accrued fees, the following adjustment needs to be made:
Account affected: Accrued Fees
Increase: $19,900
Account affected: Fees Earned
Increase: $19,900
b. If the cash basis had been used instead of the accrual basis, an adjustment would not have been necessary. This is because under the cash basis, revenues are recognized only when cash is received, and expenses are recognized only when cash is paid. Therefore, since the fees have not yet been billed to clients, no cash payment has been received, and there would be no need to record an adjustment under the cash basis.
a. To record the accrued fees, the following adjustment needs to be made:
Account: Accrued Fees
Increase: $19,900
Explanation: Accrued fees represent revenue that has been earned but not yet billed to clients. Since these fees have been earned by the end of the current year but not yet billed, an adjustment is needed to recognize this revenue. The accrued fees account is increased by $19,900 to reflect the amount of fees earned but not yet billed.
b. If the cash basis were used instead of the accrual basis, an adjustment would not be necessary. The cash basis of accounting recognizes revenue only when cash is received from clients. Under this method, the revenue is recorded when the fees are actually billed and the cash is received.
In this scenario, if the cash basis were used, the revenue would only be recognized when the fees are billed to clients, and not before. Therefore, since the accrued fees represent revenue that has been earned but not yet billed, it would not be recognized under the cash basis. Consequently, no adjustment would be required as the revenue would not be recorded until the cash is received from clients according to the cash basis of accounting.