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