There are two different types of adjustments that accountants make at the end of the period, deferrals and accruals. There are deferred revenue, deferred expenses, accrued revenue and accrued expenses.

Using the Fortune 500 company that selected in Chapter 1, think about the company and what type of adjustment might this company make at the end of the fiscal period (month, quarter or year). Tell us about that adjustment, explain why the company would make the adjustment, what type of adjustment it is (deferred revenue, deferred expenses, accrued revenue or accrued expenses) and give an example of the adjustment including the journal entry.

Here is an example:

Southwest Airlines is a publicly traded company and it is an airline. Customers purchase their tickets in advance of their travel. So when the customer purchases their tickets, the company must record unearned revenue since the travel has not yet happened. This is an example of deferred revenue, which is recorded in a liability account, since they have not yet earned their revenue (because they have not yet satisfied the performance obligation).

After the flight happens, Southwest Airlines can record (earn) the revenue. To do this they would debit unearned revenue (to reduce the liability) and credit revenue (to recognize the revenue earned).