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Accumulated Adjustment Account Definition
As used in the United States, the Accumulated Adjustments Account (AAA) is an account that contains the net retained earnings of a corporation. It is often used by S corporations, it is an item on a corporation’s balance sheet that accounts for taxable income that are passed to stakeholders. According to the United States tax code, there are earnings or profits that corporations are required to retain in their balance sheet, this is to ensure that taxable income distributed to shareholders are given required tax treatments.
Both deferred and accumulated income are accounted for in accrual accounting. Deferred income is payment made for goods and services that are yet to be delivered.
A Little More on What is an Accumulated Adjustment Account
Unlike deferred income, an accumulated income occurs when money is yet to be received after goods have been supplied or services provided. This revenue is called account receivable. Accumulated income are often included when calculating the balance sheet of a firm at a period of time.
An accumulated income also refers to the interest that a company accumulates on income that has been earned but is yet to be received. This interest is recorded as interest receivable in a company’s active account. Accumulated income is added to the list of accounts receivable, money earned but not received.
Deferred income is the opposite of accumulated income, in this situation, a company receives money for goods and services it is yet to provide. When computing the balance sheet or income statement of a firm, deferred income are called deposits and not regarded as real income, rather, they are related to liabilities. Since a deferred income is not a real income, the net income of a company is not affected by its value.
Once the expected goods and services are however delivered, the real income value can be accounted for.
Adjustment of entries
In some cases, companies fail to recognize the importance of accumulated revenues and deferred revenues as they occur in transactions. Some companies even fall into the pitfall of placing deferred income above accumulated income, that is, they neglect accumulated income and accord value to deferred income to the extent that it is seen as a real or regular income. However, this anomaly can be corrected during adjustment of entries at the closing accounting process of a company. The adjustment might include a review of the revenues to ensure that all incomes are well accounted for and put in right categories.
Deferred income is quite different from accumulated income and their differences must be considered when computing a company’s cash flow at a period of time. For instance, while deferred income is cash received even before goods and services are delivered, it might take awhile before cash is received in the case of accumulated income. Income might not be received until days, weeks or even months after goods and services have been provided in accumulated income.
Both accumulated and deferred accounts are dynamic in nature, changes in these numbers must also be considered when accounting for cash flows.
References for Accumulated Adjustment Account
- https://definitions.uslegal.com/a/accumulated-adjustments-account/ https://acronyms.thefreedictionary.com/Accumulated+Adjustments+Account
Academic Research for Accumulated Adjustment Account
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