prepaid expenses, debiting the prepaid expense always comes first. Secondly, you would credit
the cash/bank before the expense is incurred. After the expense is incurred, you would debit the
expense account and credit the prepaid expenses. An example of prepaid expenses would be
when a business pays $12,000 in rent for the next twelve months in January, and each month
$1,000 is expensed and the prepaid rent account is reduced (Accountancy, 2024). Moreover,
deferred revenues refer to cash that has been received prior to the service being performed or
goods are delivered. When adjusting entries for deferred revenues, the original entry should debit
the cash account and credit the unearned revenue account. The adjustment should debit the
unearned revenue and credit the service revenue account. An example of deferred revenues
would be a gym receiving $600 for a six-month membership in December, and the revenue is
recognised monthly at $100 per month (Accountancy, 2024).
Furthermore, the financial statements will be inaccurate if the necessary adjusting entry
for prepayments is not made. More precisely, there is no record of the costs spent over that
period if prepaid expenses are not modified. The net income would be overstated due to
excessively low expenses. Due to the failure to include the decrease in the amount used, the
assets would be overestimated. The overstatement of the net income would result in the
shareholders’ equity experiencing a pyramid effect. Finally, there would be no impact on
liabilities. However, the liability should be decreased if earned revenue is not recognized. The
earned revenue would not be recognized, resulting in an underestimated net income. Since the
money was received in advance, there would be no impact on the assets. Due to the failure to
minimize the unearned revenue, the liabilities would be exaggerated. Finally, because the net
income is overstated, the shareholders' equity would also be understated.
Requirement 3
Moreover, accrued expenses are expenses that have been incurred but not yet paid. When
adjusting entries for accrued expenses, debiting the expense account always comes first.
Secondly, you would credit the accrued liabilities. An example of accrued expenses would be a
business having an unpaid electricity bill of $1,500 for December. Even though the payment is
made in January, the expense is recorded in December (Accountancy, 2024). Differently, accrued
revenues are revenues that have been earned but not yet received or recorded. When adjusting
entries for accrued revenues, debiting accounts receivable comes first. Next, you would credit
revenues. For instance, “a consulting firm completes a project worth $5,000 in December. The
invoice is sent in January, but the revenue is recorded in December” (Accountancy, 2024).
Additionally, financial statements may also be erroneous if accumulated costs or income are not
adjusted. In particular, net income would be exaggerated to cover accrued expenses. Due to non-
involvement, the assets would remain unaffected. Due to the payables not being reported, the
liabilities would be understated. Last but not least, the excessively high retained earnings would
inflate the shareholders' equity. On the other hand, non-adjustment for accumulated revenues
does not account for earned revenue. The understatement of net income would result from the
failure to report revenue. Since the assets would not be recorded in accounts receivable, they
would be underestimated. Liability would not be a factor. The low retained earnings would also
result in an understatement of shareholders' equity.
All things considered, “The Lord detests dishonest scales, but accurate weights find favor with
him” (Proverbs 11:1, New International Version). Accruals and prepayments contribute to a fair
and accurate representation of a business's financial status that isn't skewed by cash timing.
This upholds the biblical mandate for truthful transactions and equitable measurements.
References
Accountancy. (2024, December 23). Accruals and prepayments: Understanding their role
in accounting. Auditing Accounting. Retrieved [August 19, 2025], from
AuditingAccounting.com
Spiceland, J. D., Nelson, M. W., & Thomas, W. (2025). Intermediate accounting (14th
ed.). McGraw-Hill Education.
The Holy Bible: New International Version. (2011). Zondervan. (Original work published
1978)
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