Observe: 1.the recognition of income and expense
................ 2. payment? (is there any? “guess non”)
Saturday, January 10, 2009
A. ACCRUED EXPENSES (Payable)
…………………This is used to record expenses that are already incurred (used) by the business but not yet paid when the accounting period ends. If expenses will be paid at a future date, a liability account must be credited (Accrued Expense).
“in short po ito ay mga expenses na hindi mo pa nababayaran, kaya maliban sa Pagkakaroon ng expense nagkaroon din tau ng Utang or Liability, and that liability account should berecorded as “Accrued Expense” or Expense Payable” if and only if those expenses has not yet been recorded”
………………..“As what Expense Recognition Principle states, “all expenses should be recognized in the period these are incurred regardless whether paid or not”, its appropriate for us to make adjustments on the unrecorded expenses incurred at the end of the period to report all expenses incurred to produce the revenues during the accounting period.
….……………………………Pro-forma Adjusting Entries
……………….._______________ Expense……………..xx
………… ….........….Accrued _________ Expense…………….xx
…………To Illustrate:
………………The business is renting a space for 5000Php per month, payable every first day of the following month. The rental for the month of December was not paid when the accounting period ended on December 31, 2008. The business intends to pay the rental on January 1, 2009, the 1st day of the following month. The business accounting period ends every 31st of the year.
………….Analysis:
………………“Take note of the cut-off period (December 31, 2008)”
……………….“The Rent Expense should be recorded and reported in 2008, the period when the rent expense was incurred and not in 2009, the period where the rent expense will be paid.(with due respect to EXPENSE RECOGNITION PRINCIPLE).”
.....................“kung kelan sya nagamit dun din sya irerecord hindi ung kung kelan sya
babayaran, with due respect to our principles”
……………….“The adjusting entry should be prepared on December 31, 2008 to record the Rent Expense incurred and to recognize the corresponding Liability Account (Accrued Expense)
……………………………………....ADJUSTING ENTRY
…………………….Rent Expense……………………….5000
………………………..Accrued Rent Expense……………….5000
……….In the pro-forma adjusting entry, just fill in the blank of what account that have been accrued, so as if what have been accrued are-
1. Unpaid Salaries
…...................Salaries Expense…....…....……………....xx
……………………….Accrued Salaries Expense…………..xx
2. Unpaid Interest
......................Interest Expense………………...............xx
……………………….Accrued Interest Expense……………xx
Note: the accounts Accrued Rent Expense, Accrued Salaries Expense, Accrued Interest Expense, etc. are similar to Rent Payable, Salaries Payable, Interest Payable, etc. The term “accrued” when associated with an expense account connotes “payable” which means liability.
Effects of Error/Omission on Financial Statements
Income Statement- since Rental Expense has not been recorded, total expenses at the end of the period is understated. Deducting a smaller amount of expense that it should have been will overstate Net Income.
Balance Sheet- Since the liability will not be recognized, total liabilities reported in the Balance Sheet is understated. Owner’s Equity is overstated because the net income that’s is closed to capital is also overstated or better see the basic accounting Equation, A=L+P and assume any amount.
Financial Statements Presentation
.............Rent Expense, being a nominal account will be presented in the Income Statement Accrued Rent Expense, being a real account will be presented as a current liability in the liability section of the Balance Sheet.
“in short po ito ay mga expenses na hindi mo pa nababayaran, kaya maliban sa Pagkakaroon ng expense nagkaroon din tau ng Utang or Liability, and that liability account should berecorded as “Accrued Expense” or Expense Payable” if and only if those expenses has not yet been recorded”
………………..“As what Expense Recognition Principle states, “all expenses should be recognized in the period these are incurred regardless whether paid or not”, its appropriate for us to make adjustments on the unrecorded expenses incurred at the end of the period to report all expenses incurred to produce the revenues during the accounting period.
….……………………………Pro-forma Adjusting Entries
……………….._______________ Expense……………..xx
………… ….........….Accrued _________ Expense…………….xx
…………To Illustrate:
………………The business is renting a space for 5000Php per month, payable every first day of the following month. The rental for the month of December was not paid when the accounting period ended on December 31, 2008. The business intends to pay the rental on January 1, 2009, the 1st day of the following month. The business accounting period ends every 31st of the year.
………….Analysis:
………………“Take note of the cut-off period (December 31, 2008)”
……………….“The Rent Expense should be recorded and reported in 2008, the period when the rent expense was incurred and not in 2009, the period where the rent expense will be paid.(with due respect to EXPENSE RECOGNITION PRINCIPLE).”
.....................“kung kelan sya nagamit dun din sya irerecord hindi ung kung kelan sya
babayaran, with due respect to our principles”
……………….“The adjusting entry should be prepared on December 31, 2008 to record the Rent Expense incurred and to recognize the corresponding Liability Account (Accrued Expense)
……………………………………....ADJUSTING ENTRY
…………………….Rent Expense……………………….5000
………………………..Accrued Rent Expense……………….5000
……….In the pro-forma adjusting entry, just fill in the blank of what account that have been accrued, so as if what have been accrued are-
1. Unpaid Salaries
…...................Salaries Expense…....…....……………....xx
……………………….Accrued Salaries Expense…………..xx
2. Unpaid Interest
......................Interest Expense………………...............xx
……………………….Accrued Interest Expense……………xx
Note: the accounts Accrued Rent Expense, Accrued Salaries Expense, Accrued Interest Expense, etc. are similar to Rent Payable, Salaries Payable, Interest Payable, etc. The term “accrued” when associated with an expense account connotes “payable” which means liability.
Effects of Error/Omission on Financial Statements
Income Statement- since Rental Expense has not been recorded, total expenses at the end of the period is understated. Deducting a smaller amount of expense that it should have been will overstate Net Income.
Balance Sheet- Since the liability will not be recognized, total liabilities reported in the Balance Sheet is understated. Owner’s Equity is overstated because the net income that’s is closed to capital is also overstated or better see the basic accounting Equation, A=L+P and assume any amount.
Financial Statements Presentation
.............Rent Expense, being a nominal account will be presented in the Income Statement Accrued Rent Expense, being a real account will be presented as a current liability in the liability section of the Balance Sheet.
B.ACCRUED REVENUE (Receivable)
.......This is used to record an income already earned by the business but not yet collected when the accounting period ends. If the Revenue has not been recorded on the date it was earned it is necessary for us to record an adjusting entry. The purpose of this is to record the omitted Income earned and recognized, together with its corresponding Asset, Accrued Revenue (collectible or receivable) account that took part on that accounting period.
..................“do I have to explain this furthermore? ^_^”
..................“ito daw po ung mga services or other income sources dat has been rendered. so pag narender mo na, nagawa na means may income ka na regardless if a payment has been collected or not, but in this case the business already earned the income yet payment has not been collected, even though as it goes that way, dapat pa rin na irecord natin un, so together with the income that has not yet been recorded goes a Receivable (asset) account, Accrued Revenue”
....................“if and only if the assumption is that those income has not yet been recorded”
.....................................Pro-forma Adjusting Entry
............Accrued ___________ Revenue....................Phpxx
..............................___________ Revenue..................................Phpxx
To Illustrate:
On June 2, 2008 Nobody’s Company omitted to record its laundry service rendered to a customer on account, 2000Php. Payment is expected to be collected on the 28th of April and the company ended its accounting period on a monthly basis.
Analysis:
.................for no journal entry has been recorded to recognize the revenue earned, adjusting entry must be presented to report the revenue earned during the accounting period. And for it has been rendered on account, together with the revenue account, accrued income (receivable) must be debited to record the asset that is expected to be collected even after the accounting period.
................................................Adjusting Entry
............Accrued Service Revenue....................2,000
...........................Service Revenue...................................2,000
Illustrative Case for ACCRUED INTEREST INCOME:
..............On Dec. 2, 2008, Nobody’s Company received a 100,000Php 6%, 60 day-note from Someone Company.
Explanation: (don’t explain ur friends don’t nid 8, ur enemies won’t believe 8 anyway :D (paadlib ^_^V pis) )
Upon receipt of the note on December 2, 2008, the journal entry is
..........................Notes Receivable...........................100,000
..................................Cash.......................................................100,000
.............................................Received a 100,000, 6%, 60 day-note.
Since the note is interest bearing, interest is computed by using the simple formula as follows:
Interest = Principal x Rate of Interest x Time
I=Prt
I= 100,000Php x 6% or 0.06 per year x 60/360
= 1,000Php
The interest on Notes Receivable for 60 days or 2 months period is
1,000Php or 500Php per month.
ANALYSIS:
..................Counting from December 2, 2008 to complete 60 days, the maturity value
of the note will be 101,000Php (Principal= 100,000Php + 1,000Php (Interest)) which will due for collection on January 30, 2009. Recording the interest on Notes of 1,000Php upon maturity date follows that the period of 2009 records the Interest Income of 2008 which is a violation of “Revenue Recognition Principle”. Since the accounting period will end on Dec. 31, 2008 a portion of Interest Income representing December 2 to December 31, 2008 of 500Php should be recorded on Dec. 31, 2008. Record the Interest Income earned during the period and recognizes the corresponding Asset (Accrued Income) account.
.......................................................Adjusting Entry
............2008
...........Dec. 31........Accrued Interest Income..................500
........................................Interest Income.....................................500
.............................In the stated pro-forma adjusting entry for Accrued Income adjustments,
Just fill in the blank of what account that have been accrued, so as of what been accrued are;
Uncollected Rent
Accrued Rent Income..............................xx
................Rent Income...................................xx
Uncollected Interest
Accrued Interest Income........................xx
................Interest Income.............................xx
The account Accrued ___ Income is similar to _____ Receivable. The Term “accrued” when associated with an income accounts connotes “receivable” which means an asset.
EFFECT OF ERROR/ OMISSION ON FINANCIAL STATEMENT
........................If adjusting entry is not prepared on Dec. 31, 2008 the effects are as follows:
Income Statement- since Income has not been recorded, the total income
reported was understated, Thus Net Income is understated.
Balance Sheet- since the Receivable account (Accrued Income) has not been
omitted, the Asset account will now then be understated. Likewise
the Owner’s Equity account will now be understated due to the
understatement of the Net Income.
FINANCIAL STATEMENTS PRESENTATION
Accrued ____ Income being a real account will be presented in the current asset section of the Balance Sheet while the ____ Income as a nominal or temporary account will be reported in the Income Statement.
..................“do I have to explain this furthermore? ^_^”
..................“ito daw po ung mga services or other income sources dat has been rendered. so pag narender mo na, nagawa na means may income ka na regardless if a payment has been collected or not, but in this case the business already earned the income yet payment has not been collected, even though as it goes that way, dapat pa rin na irecord natin un, so together with the income that has not yet been recorded goes a Receivable (asset) account, Accrued Revenue”
....................“if and only if the assumption is that those income has not yet been recorded”
.....................................Pro-forma Adjusting Entry
............Accrued ___________ Revenue....................Phpxx
..............................___________ Revenue..................................Phpxx
To Illustrate:
On June 2, 2008 Nobody’s Company omitted to record its laundry service rendered to a customer on account, 2000Php. Payment is expected to be collected on the 28th of April and the company ended its accounting period on a monthly basis.
Analysis:
.................for no journal entry has been recorded to recognize the revenue earned, adjusting entry must be presented to report the revenue earned during the accounting period. And for it has been rendered on account, together with the revenue account, accrued income (receivable) must be debited to record the asset that is expected to be collected even after the accounting period.
................................................Adjusting Entry
............Accrued Service Revenue....................2,000
...........................Service Revenue...................................2,000
Illustrative Case for ACCRUED INTEREST INCOME:
..............On Dec. 2, 2008, Nobody’s Company received a 100,000Php 6%, 60 day-note from Someone Company.
Explanation: (don’t explain ur friends don’t nid 8, ur enemies won’t believe 8 anyway :D (paadlib ^_^V pis) )
Upon receipt of the note on December 2, 2008, the journal entry is
..........................Notes Receivable...........................100,000
..................................Cash.......................................................100,000
.............................................Received a 100,000, 6%, 60 day-note.
Since the note is interest bearing, interest is computed by using the simple formula as follows:
Interest = Principal x Rate of Interest x Time
I=Prt
I= 100,000Php x 6% or 0.06 per year x 60/360
= 1,000Php
The interest on Notes Receivable for 60 days or 2 months period is
1,000Php or 500Php per month.
ANALYSIS:
..................Counting from December 2, 2008 to complete 60 days, the maturity value
of the note will be 101,000Php (Principal= 100,000Php + 1,000Php (Interest)) which will due for collection on January 30, 2009. Recording the interest on Notes of 1,000Php upon maturity date follows that the period of 2009 records the Interest Income of 2008 which is a violation of “Revenue Recognition Principle”. Since the accounting period will end on Dec. 31, 2008 a portion of Interest Income representing December 2 to December 31, 2008 of 500Php should be recorded on Dec. 31, 2008. Record the Interest Income earned during the period and recognizes the corresponding Asset (Accrued Income) account.
.......................................................Adjusting Entry
............2008
...........Dec. 31........Accrued Interest Income..................500
........................................Interest Income.....................................500
.............................In the stated pro-forma adjusting entry for Accrued Income adjustments,
Just fill in the blank of what account that have been accrued, so as of what been accrued are;
Uncollected Rent
Accrued Rent Income..............................xx
................Rent Income...................................xx
Uncollected Interest
Accrued Interest Income........................xx
................Interest Income.............................xx
The account Accrued ___ Income is similar to _____ Receivable. The Term “accrued” when associated with an income accounts connotes “receivable” which means an asset.
EFFECT OF ERROR/ OMISSION ON FINANCIAL STATEMENT
........................If adjusting entry is not prepared on Dec. 31, 2008 the effects are as follows:
Income Statement- since Income has not been recorded, the total income
reported was understated, Thus Net Income is understated.
Balance Sheet- since the Receivable account (Accrued Income) has not been
omitted, the Asset account will now then be understated. Likewise
the Owner’s Equity account will now be understated due to the
understatement of the Net Income.
FINANCIAL STATEMENTS PRESENTATION
Accrued ____ Income being a real account will be presented in the current asset section of the Balance Sheet while the ____ Income as a nominal or temporary account will be reported in the Income Statement.
A.PREPAID EXPENSES
This is an expense that is already paid but not incurred.
This is exactly the opposite of accrued expense. There are two methods or approaches that can be used in recording prepayments, namely: Expense Method and Asset Method.
a. Expense Method- under this method or approach, an expense
................account is debited upon payment of the prepaid expense.
................This method is also called “nominal approach” because
................an expense is an Income Statement accounts.
b. Asset Method- under this method or approach, an asset account is
................Debited upon payment of the prepaid expense, that’s why it is also called as the “real
................approach” for an asset account is a real account.
.................“in short ang prepaid expense ay parang prepaid load lang yan, pagkatapos ng isang araw ung ibang load mo gamit na so that’s ur expense, pero ung iba hindi pa and that makes ur assets, dba mas maganda kung pagbukurin ang expense at asset pra malaman mo kung ilan pang load ang pwede mo pang ipang text sakin ^_^V”
(yuck A.S.A nmn ako :D)
And to arrive at that point we must allocate its value to its respective account.
Worth of the Purchased Supplies = 20,000Php
Worth of Unused supplies at the end of accounting period =5,000Php (as stated)
Therefore:
20,000- 5,000 = 15,000 (Used supplies or supplies expense at the end of the accounting
“ tagalog pa ba?^_^V”
“If ung journal entry nyo daw nung nagbayad kau eh nagrecognize ng expense account so means sa adjusting entry ung asset account nmn dapat mo irecognize so natural ung amount na irerecognize mo eh ung amount din ng asset mo, kung ano ang hindi pa narerecognize sya irerecord mo together with its respective amount”
.................2.if an asset account is debited upon payment or upon recording the Journal Entry (Asset Method), the adjusting entry must recognize the expense account which has not been recorded. Therefore; credit the asset account and debit the expense account.
“^_^V gets mo na sana”
This is exactly the opposite of accrued expense. There are two methods or approaches that can be used in recording prepayments, namely: Expense Method and Asset Method.
a. Expense Method- under this method or approach, an expense
................account is debited upon payment of the prepaid expense.
................This method is also called “nominal approach” because
................an expense is an Income Statement accounts.
b. Asset Method- under this method or approach, an asset account is
................Debited upon payment of the prepaid expense, that’s why it is also called as the “real
................approach” for an asset account is a real account.
.................“in short ang prepaid expense ay parang prepaid load lang yan, pagkatapos ng isang araw ung ibang load mo gamit na so that’s ur expense, pero ung iba hindi pa and that makes ur assets, dba mas maganda kung pagbukurin ang expense at asset pra malaman mo kung ilan pang load ang pwede mo pang ipang text sakin ^_^V”
(yuck A.S.A nmn ako :D)
.................“pero if pagkatapos ng isang araw na un ubos na load nyo, natural wag na kaung magbalak magbukod, ala na nmn kau paghiwalayin eh :D, parang prepaid expense din when the accounting period ends, then lahat namn ng narecord mo na expense (take note ha expense) ay nagamit mo, wag ka na gumawa ng adjusting entry ala na kwenta un kasi la nmn kau paghihiwalayin na accounts, para lang po yan sa paghihiwalay ng expense mo sa asset mo pa nung pagdating ng end of accounting period, pero pag Asset account nirecord mo nung umpisa aun nid mo na mag adjusting kasi may asset ka pa ba, dba sabi ko ubos na so expense na un :D”
To Illustrate the difference bet 2 methods:
..........On June 2, 2008 Nobody Company paid 20,000Php for the
supplies purchased. At the end of accounting period, 5,000Php of the supplies
remain unused.
JOURNAL ENTRY using….
Upon payment on June 2, 2008
........................................EXPENSE METHOD
To Illustrate the difference bet 2 methods:
..........On June 2, 2008 Nobody Company paid 20,000Php for the
supplies purchased. At the end of accounting period, 5,000Php of the supplies
remain unused.
JOURNAL ENTRY using….
Upon payment on June 2, 2008
........................................EXPENSE METHOD
...........Supplies Expense............................... 20,000
............................Cash .......................................................20,000
............................Cash .......................................................20,000
.........................................ASSET METHOD
..........Prepaid Supplies................................. 20,000
...........................Cash......................................................... 20,000
Now, the illustrative case states that 5000Php worth of supplies remains unused at the end of accounting period.
Regardless of which method used in recording the prepayment of the purchased supplies worth 20,000Php at the end of the period it is still a “mixed account” or a mixture of both Asset (unused supplies) and Expense (used supplies). For us to bring up the correct balance of those accounts, it’s a must for us to “split up” the 20,000Php worth of supplies into its real account (expense and asset).
..........Prepaid Supplies................................. 20,000
...........................Cash......................................................... 20,000
Now, the illustrative case states that 5000Php worth of supplies remains unused at the end of accounting period.
Regardless of which method used in recording the prepayment of the purchased supplies worth 20,000Php at the end of the period it is still a “mixed account” or a mixture of both Asset (unused supplies) and Expense (used supplies). For us to bring up the correct balance of those accounts, it’s a must for us to “split up” the 20,000Php worth of supplies into its real account (expense and asset).
And to arrive at that point we must allocate its value to its respective account.
Worth of the Purchased Supplies = 20,000Php
Worth of Unused supplies at the end of accounting period =5,000Php (as stated)
Therefore:
20,000- 5,000 = 15,000 (Used supplies or supplies expense at the end of the accounting
period)
After allocating or splitting up to its respective accounts adjusting entry must be recorded: The adjusting entry for a prepaid expense depends on the entry originally made at the time it was paid
Using the Expense Method:
.............................................................Journal Entry
Jun 2, 2008.........Supplies Expense........................ 20,000
......................................Cash ..........................................................20,000
............................................................Adjusting Entry
Dec. 31, 2008..... Unused or Prepaid Supplies......5,000
......................................Supplies Expense...................................... 5,000
After allocating or splitting up to its respective accounts adjusting entry must be recorded: The adjusting entry for a prepaid expense depends on the entry originally made at the time it was paid
Using the Expense Method:
.............................................................Journal Entry
Jun 2, 2008.........Supplies Expense........................ 20,000
......................................Cash ..........................................................20,000
............................................................Adjusting Entry
Dec. 31, 2008..... Unused or Prepaid Supplies......5,000
......................................Supplies Expense...................................... 5,000
checking:
Supplies Expense = 20,000 (journal entry)
Supplies Expense = 20,000 (journal entry)
........................................ - 5,000 (adjusting entry)Credited(-)
..........................................=======
..........................................=======
..........................................15,000 ending balance
Unused Supplies or Prepaid Supplies
........................................= 0.00 (journal entry)
........................................+5,000 (adjusting entry)Debited (+)
.........................................=====
..........................................5,000 ending balance
Using the Asset Method:
..............................................................Journal Entry
June 2, 2008...... Unused or Prepaid Supplies........ 20,000
.....................................Cash........................................................ 20,000
..............................................................Adjusting Entry
Dec. 31, 2008.... Supplies Expense.......................... 15,000
.....................................Unused Supplies................................... 15,000
Now check it for yourself using the T-Account ^_^
OBSERVE: 1. if an expense account is debited upon payment or upon recording the
.........................Journal entry (Expense Method), the adjusting entry must recognize
Using the Asset Method:
..............................................................Journal Entry
June 2, 2008...... Unused or Prepaid Supplies........ 20,000
.....................................Cash........................................................ 20,000
..............................................................Adjusting Entry
Dec. 31, 2008.... Supplies Expense.......................... 15,000
.....................................Unused Supplies................................... 15,000
Now check it for yourself using the T-Account ^_^
OBSERVE: 1. if an expense account is debited upon payment or upon recording the
.........................Journal entry (Expense Method), the adjusting entry must recognize
..........................the asset account. Therefore credit the expense account ; debit the
..........................asset account.
“ tagalog pa ba?^_^V”
“If ung journal entry nyo daw nung nagbayad kau eh nagrecognize ng expense account so means sa adjusting entry ung asset account nmn dapat mo irecognize so natural ung amount na irerecognize mo eh ung amount din ng asset mo, kung ano ang hindi pa narerecognize sya irerecord mo together with its respective amount”
.................2.if an asset account is debited upon payment or upon recording the Journal Entry (Asset Method), the adjusting entry must recognize the expense account which has not been recorded. Therefore; credit the asset account and debit the expense account.
“^_^V gets mo na sana”
B. PRECOLLECTION OF INCOME
...................Reminder: pls do read and understand “prepaid expense first” :D
..................“this refers to the revenue that has not yet been rendered or earned by the company but paid by the customers in advance, therefore we can classify Pre-collected or Unearned Revenue as Liability account and not a Revenue account for we haven’t yet rendered any service as an exchange for the payments received.”
..................“this is income that is already collected but not yet earned. This is exactly the opposite of “accrued revenue” - Lopez
There are two approaches that can be used in recording pre-collections upon the date of pre-collection or upon recording the Journal Entry:
Income Method
.................“under this method or approach, an income account is credited upon collection of receipt of cash or upon recording the JE. This method is also called “Nominal approach” because a revenue account is an Income Statement account.
Liability Method
..................“under this approach, a liability account is credited upon collection or upon recording the JE. This method is also called “Real approach” because a liability account is a balance sheet account and for all balance sheet accounts are called Real Accounts.
Illustrative Case 1:
....................................On June 2, 2008 Nobody’s Dormitory received a payment from a tenant as an advance payment for the room rental for 10 months, worth 50,000Php.
The transaction has been recorded upon the pre-collection of cash, using any of these methods:
......................................................Journal Entry
Analyzing the case
The 50,000Php that has been pre-collected on June 2, 2008 covers 12months of advance payment from the given date. The dormitory’s accounting period ends on December 31, 2008, from the month of June to December covers 6 months; the tenant paid for 10 months rental on advance, therefore on December 31 the 50,000Php must be split-upped,
To allocate:
.........................50,000
....................../10 months
........................========
........................5,000 per month
Solve for the Rent Income earned:
.............June- December = 6 months
...........................................x 5,000Php
...............................................=======
..............................................30,000Php = earned income ending balance
Solve for the Unearned Income:
.............................................50,000 – 30,000 = 20,000Php
..................................................................or
.......................10 months – 6 months = 4 months x 5,000 = 20,000Php
To illustrate the split up:
50,000= 30,000(Earned Income)
+20,000 (Unearned Income)
To record the ADJUSTMENT using the…
INCOME METHOD:
...................................................Journal Entry
...............June 2, 2008...Cash...............................50,000
...............................................Rent Income...........................50,000
................................................ Adjusting Entry
..............Dec. 31, 2008....Rent Income..............20,000
................................................Unearned Rent Income..... 20,000
LIABILITY METHOD:
....................................................Journal Entry
....June 2, 2008....Cash............................................. 50,000
.......................................Unearned Rent Income...................50,000
................................................ Adjusting Entry
....Dec. 31, 2008 ..Unearned Rent Income.....30,000
........................................Rent Income...................................30,000
..................“this refers to the revenue that has not yet been rendered or earned by the company but paid by the customers in advance, therefore we can classify Pre-collected or Unearned Revenue as Liability account and not a Revenue account for we haven’t yet rendered any service as an exchange for the payments received.”
..................“this is income that is already collected but not yet earned. This is exactly the opposite of “accrued revenue” - Lopez
There are two approaches that can be used in recording pre-collections upon the date of pre-collection or upon recording the Journal Entry:
Income Method
.................“under this method or approach, an income account is credited upon collection of receipt of cash or upon recording the JE. This method is also called “Nominal approach” because a revenue account is an Income Statement account.
Liability Method
..................“under this approach, a liability account is credited upon collection or upon recording the JE. This method is also called “Real approach” because a liability account is a balance sheet account and for all balance sheet accounts are called Real Accounts.
Illustrative Case 1:
....................................On June 2, 2008 Nobody’s Dormitory received a payment from a tenant as an advance payment for the room rental for 10 months, worth 50,000Php.
The transaction has been recorded upon the pre-collection of cash, using any of these methods:
......................................................Journal Entry
Analyzing the case
The 50,000Php that has been pre-collected on June 2, 2008 covers 12months of advance payment from the given date. The dormitory’s accounting period ends on December 31, 2008, from the month of June to December covers 6 months; the tenant paid for 10 months rental on advance, therefore on December 31 the 50,000Php must be split-upped,
To allocate:
.........................50,000
....................../10 months
........................========
........................5,000 per month
Solve for the Rent Income earned:
.............June- December = 6 months
...........................................x 5,000Php
...............................................=======
..............................................30,000Php = earned income ending balance
Solve for the Unearned Income:
.............................................50,000 – 30,000 = 20,000Php
..................................................................or
.......................10 months – 6 months = 4 months x 5,000 = 20,000Php
To illustrate the split up:
50,000= 30,000(Earned Income)
+20,000 (Unearned Income)
To record the ADJUSTMENT using the…
INCOME METHOD:
...................................................Journal Entry
...............June 2, 2008...Cash...............................50,000
...............................................Rent Income...........................50,000
................................................ Adjusting Entry
..............Dec. 31, 2008....Rent Income..............20,000
................................................Unearned Rent Income..... 20,000
LIABILITY METHOD:
....................................................Journal Entry
....June 2, 2008....Cash............................................. 50,000
.......................................Unearned Rent Income...................50,000
................................................ Adjusting Entry
....Dec. 31, 2008 ..Unearned Rent Income.....30,000
........................................Rent Income...................................30,000
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