Hello!
I have decided to revisit the Accounting textbook by Willey, and here is what I stumbled upon in section Accruals. I will be grateful for your help - am I mistaken, or a book suggested something incorrect?
Quote:
In October, Pioneer Advertising performed services worth $200 that were not
billed to clients on or before October 31. Because these services are not billed,
they are not recorded. The accrual of unrecorded service revenue increases an
asset account, Accounts Receivable. It also increases owner’s equity by increasing
a revenue account, Service Revenue.
End of quote.
We do open an account Revenue (service or otherwise) only when:
-
the revenue is earned, i.e. services or goods provided;
-
revenue is recognized, i.e. we billed the Client (so we do have something that can be converted into cash, and thus open Accounts Receivalbe account), or we get cash (increase our Cash account).
But the paragraph above clearily states that the Client has not been billed, and only services were provided; as the Client has not been billed, he didn’t receive an invoice, or some other document of this kind, hence he didn’t recognize that he recieved the service. So how is it possible to open both AR account and Service Revenue account if one of the revenue recognition criterias is not met?
Here is what they write further:
Quote:
The asset Accounts Receivable shows that clients owe Pioneer $200 at the
balance sheet date. The balance of $10,600 in Service Revenue represents the
total revenue for services performed by Pioneer during the month ($10,000 1
$400 1 $200). Without the adjusting entry, assets and owner’s equity on the
balance sheet and revenues and net income on the income statement are
understated. End of quote.
How can the Client owe something to the company if he hasn’t been billed? Also how can assets (total assets) be underestimated, and also revenues underestimated, if no matter where the money is recorded (AR or cash) the total assets amount doesn’t change.
What do I miss here?
Thank you very much!