Correction
An adjusting entry can record revenue earned or an expense incurred before cash moves. Record the related receivable or payable at period end, then record the later cash settlement separately.
Why cash timing can mislead
Cash does not determine when every revenue or expense belongs in the financial statements. A company may complete work before it bills or collects. Employees may work before the company pays them. The period-end adjustment records the revenue, expense, receivable, or payable supported at the reporting date.
How to recognize the mistake
You may be using cash as the trigger if you:
- wait until collection to record revenue that was already earned;
- wait until payment to record an expense that was already incurred; or
- include Cash in an entry even though no cash moved on the adjustment date.
How to avoid it
Place the economic event, reporting date, and cash date on a timeline. Record the activity that belongs before the reporting date. Record the later cash settlement separately.
Harbor Design is a design-services corporation. At December 31, it has $4,800 of completed but unbilled work and owes employees $2,700 for work already done. Neither amount is recorded yet. Assume the work qualifies for revenue and Harbor's right to payment is unconditional. For the completed work, the adjustment debits Accounts Receivable and credits Service Revenue for $4,800. For the unpaid employee work, it debits Wages Expense and credits Wages Payable. Later collection and payment settle those balance-sheet accounts.
When this mistake may appear
- Work is completed or resources are used before billing, collection, or payment.
- An unadjusted trial balance is equal even though current-period activity is missing.
Your work may contain this mistake if:
- Omits accrued revenue or expense until the later cash settlement.
- Forces Cash into a period-end entry even though no receipt or payment occurred.
- Recognizes revenue or expense again when the receivable or payable settles.