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Worked-example setupScope and assumptions
- Northline opens July with $20,000 Cash and $20,000 owner-sourced equity; every other listed account opens at zero.
- The $12,000 insurance payment secures twelve months of coverage provided evenly beginning July 1.
- The $9,000 customer advance covers three equal, separately evidenced service milestones; one is completed by July 31.
- No refund, cancellation, impairment, tax, financing, or other adjustment applies.
- Period
- July through the July 31 adjusted trial balance, before closing
- Units
- USD
- Rounding
- Whole US dollars; no rounding required
Problem
Northline begins July with $20,000 Cash, $20,000 Owners' Equity, and no other balances. On July 1, it pays $12,000 for twelve months of even insurance coverage beginning that day. It also receives $9,000 for three service milestones, each priced at $3,000. By July 31, one milestone is complete and accepted; assume that completion earns its stated price.
Prepare the July 1 cash entries and July 31 adjustments. Reconcile each remaining balance and prepare the adjusted trial balance. There are no other transactions or adjustments in this example.
Cash-date analysis and entries
The insurance contract supplies future coverage, so the payment initially exchanges Cash for Prepaid Insurance. The customer cash arrives before Northline performs, so the receipt creates an Unearned Revenue liability.
Recording nothing would omit both cash events. Recording immediate $12,000 expense and $9,000 revenue would omit the future benefit and obligation.
Month-end evidence and adjustments
The insurance contract and calendar show one of twelve even months expired. The project completion record and customer acceptance show one of three equal milestones completed:
The adjustments use no Cash because the payment and receipt were already recorded. One reduces the prepaid asset and records expense. The other reduces the unearned-revenue liability and records revenue.
The four entries contain $25,000 of debit activity and $25,000 of credit activity: $12,000 + $9,000 + $1,000 + $3,000. That activity measure is not the ending trial-balance total. The later $29,000 total includes the $20,000 opening Cash and equity positions and nets all account activity into ending balances.
Rollforwards
Prepaid Insurance
$12,000 addition − $1,000 consumed = $11,000 asset remaining
Unearned Revenue
$9,000 receipt − $3,000 performed = $6,000 liability remaining
The asset rollforward needs coverage evidence; the liability rollforward needs performance evidence. Equal arithmetic alone cannot establish either premise.
Adjusted trial balance
| Account | Debit | Credit |
|---|---|---|
| Cash | $17,000 | — |
| Prepaid Insurance | $11,000 | — |
| Insurance Expense | $1,000 | — |
| Owners' Equity | — | $20,000 |
| Unearned Revenue | — | $6,000 |
| Service Revenue | — | $3,000 |
| Total | $29,000 | $29,000 |
The unadjusted and adjusted trial balances both total $29,000 on each side. The adjustments still matter: assets fall $1,000, liabilities fall $3,000, revenue rises $3,000, expense rises $1,000, and July income rises net $2,000.
Interpretation
Northline's $17,000 Cash includes a customer advance received before all service is complete. The $6,000 advance balance quantifies the stated remaining milestones, while the $11,000 prepaid balance quantifies future insurance coverage under the even-allocation assumption. Neither balance is revenue or expense merely because cash moved.
Common wrong paths
- Record nothing at the cash date: Deferral delays some recognition, not the payment, receipt, asset, or liability.
- Expense or earn the full cash amount: This ignores future coverage or unperformed milestones.
- Credit Cash in the month-end insurance entry: Cash was credited on July 1; July 31 consumption reduces Prepaid Insurance.
- Credit Unearned Revenue when service is performed: Performance reduces a credit-normal liability with a debit and increases Revenue with a credit.
- Assume unchanged trial-balance totals mean nothing changed: Account composition and July income changed even though the two column totals did not.
Verified calculation · journal entry
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- accounts
- 6 fields
Inspect data
{
"cash": {
"classification": "asset",
"opening": 20000
},
"insurance_expense": {
"classification": "expense",
"opening": 0
},
"owners_equity": {
"classification": "equity",
"opening": 20000
},
"prepaid_insurance": {
"classification": "asset",
"opening": 0
},
"service_revenue": {
"classification": "revenue",
"opening": 0
},
"unearned_revenue": {
"classification": "liability",
"opening": 0
}
}- entries
- 4 items
Inspect data
[
{
"label": "annual insurance paid in advance",
"lines": [
{
"account": "prepaid_insurance",
"credit": null,
"debit": 12000
},
{
"account": "cash",
"credit": 12000,
"debit": null
}
]
},
{
"label": "customer advance received",
"lines": [
{
"account": "cash",
"credit": null,
"debit": 9000
},
{
"account": "unearned_revenue",
"credit": 9000,
"debit": null
}
]
},
{
"label": "one month insurance consumed",
"lines": [
{
"account": "insurance_expense",
"credit": null,
"debit": 1000
},
{
"account": "prepaid_insurance",
"credit": 1000,
"debit": null
}
]
},
{
"label": "one customer milestone completed",
"lines": [
{
"account": "unearned_revenue",
"credit": null,
"debit": 3000
},
{
"account": "service_revenue",
"credit": 3000,
"debit": null
}
]
}
]Recomputed result
| Measure | Value |
|---|---|
| cash | 17,000 |
| ending credit balances | 29,000 |
| ending debit balances | 29,000 |
| insurance expense | 1,000 |
| owners equity | 20,000 |
| prepaid insurance | 11,000 |
| service revenue | 3,000 |
| total credits | 25,000 |
| total debits | 25,000 |
| trial balance difference | 0 |
| unearned revenue | 6,000 |