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, you would need to make the following journal entry:
Accounts Receivable (increase) - $19,900
Service Revenue (increase) - $19,900
In this journal entry, the accounts receivable account is increased because you have earned the fees but have not yet billed the clients for them. The service revenue account is also increased because you have earned the fees.
b. If the cash basis had been used instead of the accrual basis, an adjustment would not have been necessary. The cash basis of accounting recognizes revenue and expenses when cash is received or paid, respectively. Since the fees have not yet been billed to clients, no cash has been received, so there would be no adjustment needed. The cash basis does not recognize revenue until the cash is actually received, unlike the accrual basis which recognizes revenue when it is earned, regardless of whether cash has been received.