Deposits for Weddings Not Yet Shot and Wages Not Yet Paid: Six Year-End Adjusting Entries That Move a Photography Studio's Net Income From $61,200 to $66,000
[Student Name]
University of Phoenix
ACC/290: Principles of Accounting I
Week 3 Exercise
[Instructor Name]
[Date]
The business and all figures are a composite written for a model exercise.
A composite wedding and portrait photography studio, organized as a small corporation, ends its fiscal year on December 31. Before adjustments, its records show net income of $61,200. But the bookkeeper recorded transactions only when cash moved or a bill arrived, so several amounts do not yet reflect what was earned and used during the year. Under accrual accounting, the question is not when cash changed hands but when the studio did the work and used the resources. The revenue recognition principle records revenue when the performance obligation is satisfied, and the expense recognition principle records expenses in the period they help generate revenue (Weygandt et al., 2021). Six adjustments are needed.
Adjustment 1: Unearned Revenue (Deferral)
During the year, couples paid $42,000 in deposits for weddings, recorded as Unearned Service Revenue, a liability, because the studio owed them photography. By December 31, the studio had photographed weddings for which $18,500 of those deposits applied. The studio has satisfied its obligation for those weddings, so that portion is now revenue (Financial Accounting Standards Board [FASB], 2014).
Entry: Debit Unearned Service Revenue $18,500; credit Service Revenue $18,500.
Effect: net income increases $18,500; liabilities decrease $18,500; the remaining $23,500 stays a liability for weddings in the coming year.
Adjustment 2: Prepaid Insurance (Deferral)
On September 1, the studio paid $3,600 for a 12-month liability and equipment insurance policy, recorded as Prepaid Insurance. Four months, September through December, have been used: $3,600 divided by 12 months, times 4, equals $1,200.
Entry: Debit Insurance Expense $1,200; credit Prepaid Insurance $1,200.
Effect: net income decreases $1,200; assets decrease $1,200.
Adjustment 3: Depreciation (Deferral)
Cameras, lenses and lighting equipment costing $36,000 were bought on January 2 with an expected useful life of four years and no salvage value. Straight-line depreciation is $36,000 divided by 4, or $9,000 for the year.
Entry: Debit Depreciation Expense $9,000; credit Accumulated Depreciation $9,000.
Effect: net income decreases $9,000; the equipment's book value falls to $27,000.
Adjustment 4: Accrued Wages (Accrual)
Freelance second shooters and an editor earned $2,400 in the last week of December, to be paid on January 5.
Entry: Debit Wages Expense $2,400; credit Wages Payable $2,400.
Effect: net income decreases $2,400; liabilities increase $2,400.
Adjustment 5: Accrued Revenue (Accrual)
On December 28, the studio delivered an engagement session and album worth $1,100 but will not bill the client until January.
Entry: Debit Accounts Receivable $1,100; credit Service Revenue $1,100.
Effect: net income increases $1,100; assets increase $1,100.
Adjustment 6: Supplies Used (Deferral)
The Supplies account shows $2,900 of album materials, prints and packaging bought during the year. A count on December 31 finds $700 on hand, so $2,200 was used.
Entry: Debit Supplies Expense $2,200; credit Supplies $2,200.
Effect: net income decreases $2,200; assets decrease $2,200.
The Combined Effect
Adding the effects: plus $18,500, minus $1,200, minus $9,000, minus $2,400, plus $1,100 and minus $2,200 equals a net increase of $4,800. Adjusted net income is $61,200 plus $4,800, or $66,000. The largest adjustment, unearned revenue, increased income, while most others decreased it, which shows that adjustments do not always lower profit.
The balance sheet changes as well: liabilities fall because of the earned deposits but rise because of wages payable; assets fall because of insurance, depreciation and supplies used but rise because of the new receivable.
The Adjusted Trial Balance
After posting the six entries, the bookkeeper prepares an adjusted trial balance, which is the source for the financial statements. Among the accounts that changed: Unearned Service Revenue falls to $23,500, Prepaid Insurance to $2,400 and Supplies to $700; Accumulated Depreciation appears at $9,000; Wages Payable appears at $2,400; and Accounts Receivable rises by $1,100. Because every adjustment has equal debits and credits, the adjusted trial balance still ties, and no adjustment touched Cash, which is a useful check that each one was recorded correctly.
Why Accruals Matter
Without adjustments, the studio's statements would mislead. Revenue from weddings already photographed would sit in a liability account, equipment costs would never reach the income statement and wages owed would be ignored. Dechow (1994) found that accrual-based earnings better reflected firm performance than cash flows over short intervals, because accruals match the timing of revenues and expenses to the underlying activity.
Estimates and Judgment
Several adjustments depend on estimates: the useful life of the equipment, which weddings each deposit relates to and the supplies count. Estimates create room for judgment, and judgment can be bent toward a desired result. Graham et al. (2005), surveying more than 400 financial executives, found that many said they would give up actions that create economic value in order to meet earnings targets, and that managers care a great deal about smooth, predictable earnings. For a small studio, the stakes are lower, but a lender reviewing its statements should see estimates applied consistently from year to year.
Conclusion
Six adjusting entries, four deferrals and two accruals, moved the photography studio's net income from $61,200 to $66,000 and brought its balance sheet into line with what it owns and owes at year-end. Classifying each adjustment by type, calculating it from the facts and tracing its effect on both statements are the skills that make accrual accounting work.
References
Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3-42. https://doi.org/10.1016/0165-4101(94)90016-7
Financial Accounting Standards Board. (2014). Revenue from contracts with customers (Topic 606) (Accounting Standards Update No. 2014-09).
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
How this ACC 290 Week 3 example is structured
The ACC/290 shelf page describes Week 3 as bringing adjusting entries and accrual accounting, the week many students repeat. The exercise sorts each adjustment into its type, deferral or accrual, before recording it, because students who learn the four types can handle any adjustment, while students who memorize examples cannot. Each entry is followed by its effect on net income and the balance sheet so the reader sees why the adjustment matters. Students search this week as ACC 290 Week 3, ACC290 Wk 3 or ACC/290 Wk 3; all three are the same assignment.
ACC/290 Week 3 questions, answered
What does ACC/290 Week 3 usually ask for?
The ACC/290 shelf describes Week 3 as covering adjusting entries and accrual accounting. Many sections assign problems in which students prepare adjusting entries from a list of year-end information and then prepare an adjusted trial balance or financial statements.
What are the four types of adjusting entries?
Two deferrals, prepaid expenses and unearned revenues, where cash moved before the expense or revenue was recognized; and two accruals, accrued revenues and accrued expenses, where the revenue or expense occurred before cash moved.
Does an adjusting entry ever involve cash?
No. Adjusting entries update revenues and expenses and the related asset or liability accounts at the end of a period; cash was either already recorded or will be recorded when it moves. An adjustment that debits or credits cash signals an error.
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