Adjusting entries — accruals, deferrals, depreciation

Cash arrival rarely aligns with revenue recognition. You earn rent income evenly across the month even though the tenant paid you on the 1st. You incur electricity expense daily even though KPLC bills you at month-end. The matching principle says: report revenue when earned, report expense when incurred — regardless of cash timing. Adjusting entries are how you enforce this at period-end.

The four kinds of adjusting entry

• Accrued revenue: earned but not yet billed/collected. e.g., interest income from a 90-day deposit accrues daily; only the period that fell within this reporting period belongs here.
• Accrued expense: incurred but not yet paid. e.g., your December electricity used but invoiced in January — the expense belongs to December.
• Deferred (prepaid) expense: paid but not yet incurred. e.g., 12 months of insurance paid in advance — only 1/12 belongs to this month.
• Deferred (unearned) revenue: received but not yet earned. e.g., annual subscription paid up front — only 1/12 is revenue this month; the rest is a liability you owe the customer in future service.

Worked examples

Accrued revenue — KES 30,000 interest earned on Dec 28-31 but not paid until Jan 15:
   DR Interest Receivable   30,000
   CR Interest Income       30,000  (recognised in December)

Accrued expense — KES 12,000 of December electricity, billed Jan 5:
   DR Electricity Expense   12,000
   CR Accrued Expenses      12,000  (liability for the December usage)

Deferred expense — KES 120,000 of insurance paid Dec 1 for next 12 months,
  end-of-month adjustment for December:
   DR Insurance Expense     10,000  (1/12)
   CR Prepaid Insurance     10,000  (reduce the asset)

Deferred revenue — KES 240,000 received Dec 1 for 12 months of subscription service:
  Original entry: DR Cash 240,000 / CR Deferred Revenue 240,000
  End-of-month adjustment:
   DR Deferred Revenue      20,000  (1/12 of the liability resolved)
   CR Service Revenue       20,000  (recognised this month)

Depreciation

A long-lived asset is consumed over many periods. A coffee machine costing KES 200,000 with a 5-year useful life should expense roughly KES 40,000/year (straight-line). Each year:

DR Depreciation Expense       40,000
   CR Accumulated Depreciation   40,000

Note: Accumulated Depreciation is a contra-asset — it sits on the credit
side but is associated with the asset, reducing the net book value of
Equipment. After 3 years, Equipment shows KES 200,000 gross but KES 80,000
net (200k − 120k accumulated depreciation).