Final answer:
A deferred revenue adjusting entry is made to record cash received before services are performed or goods are delivered, reflecting it as a liability until the service or good is provided, conforming to the accrual accounting principle.
Step-by-step explanation:
The adjusting entry that is made at the end of an accounting period to reflect an exchange of cash prior to the performance of a related event is classified as a deferred revenue (or unearned revenue) adjustment. This situation occurs when a company receives payment for goods or services that it has not yet delivered or performed. The accounting principles dictate that such revenue cannot be recognized until the earning process is substantially complete.
For example, if a company receives a payment in December for services to be provided in January, it would record this initial transaction as a liability (i.e., Unearned Revenue) on its balance sheet in December. Then, once the services are performed in January, the company would need to make the adjusting entry to transfer the unearned amount to revenue. The adjusting entry would consist of debiting the Unearned Revenue account and crediting the Revenue account. This reflects that the revenue has now been earned and can be included in the income statement.
These adjustments are crucial in adhering to the accrual basis of accounting, which matches income and expenses to the period in which they are incurred, regardless of when the cash transactions occur.