Accounting 3

1. Accounting 3 Chapter 24 Section 1 Accounting for Accrued Revenue and Expenses

2. Accrued Revenue • Accrued Revenue – Revenue earned in one fiscal period but not received until a later fiscal period. • At the end of a fiscal period, accrued revenue is recorded by an adjusting entry which increases a revenue account and a receivable account.

3. Analyzing an Adjustment for Accrued Interest Income. • Accrued Interest Income – Interest earned at the end of a fiscal period, but not yet received. • To calculate interest income: • Principal x Interest Rate x Time as fraction of a year = Accrued Interest Income.

4. Analyzing an Adjustment for Accrued Interest Income. • Example: $1,000.00 loan at 12% for 90 days dated November 1. • November 1 – December 31 = 60 days • $1,000.00 (P) x 12% (IR) x 60/360 = $20.00 • So Interest Receivable (which shows the interest we have earned but will receive later) is debited for $20.00. Interest Income (which shows how much we have earned to date) will be credited for $20.00.

5. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit Journalizing Accrued Interest Income 15 Adjusting Entries Dec 31 Interest Receivable 2 0 00 Interest Income 2 0 00

6. Posting an Adjusting Entry for Accrued Interest Income • Posting these two account changes is no different than any posting we have ever done, except that these are new accounts.

7. Reversing Entries • Reversing Entry – An entry made at the beginning of one fiscal period to reverse an adjusting entry made in the previous fiscal period. • Because every temporary account must be closed at the end of a fiscal period for accurate records, the adjusting entries must be made. • However, to also accurately show the amount of money that is due to us automatically in the beginning of the next fiscal period, a reversing entry is made. • If we just left everything closed, someone coming in to look at the current fiscal period books after a note has matured and we received our interest income, would want to know where the extra money came from. The reversing entry is what takes care of that question.

8. Example: • On December 31, interest income is closed as part of the regular closing entries. (Total of $88.00) • Interest Income is debited by $88 to reduce the balance to zero. • When the 90 day maturity date of the previous note is reached (Jan 30 of the next year), the company will receive $30 in interest.

9. Example Cont’d: • Because $20 of this $30 was earned in the previous year, something must be done to show that this is still coming. • $20 is then debited to Interest Income (technically showing a negative balance) and credited to Interest Receivable (giving it a zero balance). • Once the maturity date is reached and the $30 is received, $30 is credited to interest income (which gives this account a positive $10 balance) and debited to cash. • Next two slides show visible effects.

10. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 17 Adjusting Entries Dec 31 Interest Receivable 2 0 00 Interest Income 2 0 00 Reversing Entries Jan 1 Interest Income 2 0 00 Interest Receivable 2 0 00

11. Account Account Acct No. Acct No. Post Ref Post Ref Date Date Item Item Debit Debit Credit Credit BALANCE BALANCE DEBIT DEBIT CREDIT CREDIT Interest Receivable 1120 Dec 31 G15 2 0 00 2 0 00 Adjusting Jan 1 G17 2 0 00 _______ Reversing Interest Income 7110 Dec 29 CR36 1 2 00 6 8 00 31 G15 2 0 00 8 8 00 Adjusting 31 G15 8 8 00 ___________ Closing Jan 1 G17 2 0 00 2 0 00 Reversing 30 CR51 3 0 00 1 0 00 Loan Maturity

12. Collecting a Note Receivable issued in a Previous Fiscal Period • The journalizing is done just like receiving any other note receivable. • The note receivable account and the interest income account are credited for the amount due. • The cash account is debited for the total of these two accounts. • The posting is done as shown on the previous slide for the Interest Income account.

13. Worksheet Account Title Trial Balance Adjustments Debit Credit Debit Credit Work Together p. 620 on several slides Wrenn Corporation For Year Ended December 31, 2007 Interest Receivable (a) 6 8 00 Interest Income 1 5 4 5 00 (a) 6 8 00 Follow the arrows to see the logical steps for this problem. Example: When you get to the end of a post, follow the arrow to keep you in the correct sequence.

14. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 14 Adjusting Entries Dec 06 31 Interest Receivable 1120 6 8 00 Interest Income 7110 6 8 00 Closing Entries 31 Interest Income 7110 1 6 1 3 00 Income Summary 3120 1 6 1 3 00 Look at postings now Start of pg G15 Reversing Entries Jan 07 1 Interest Income 7110 6 8 00 Interest Receivable 1120 6 8 00 Look at these postings now After viewing all posts, go to Cash Receipts Journal

15. Account Account Acct No. Acct No. Post Ref Post Ref Date Date Item Item Debit Debit Credit Credit BALANCE BALANCE DEBIT DEBIT CREDIT CREDIT Notes Receivable 1115 Nov 16 G11 3 0 0 0 00 3 0 0 0 00 Mar 07 16 CR16 3 0 0 0 00 ------------ Interest Receivable 1120 To GJ Dec 06 31 G14 6 8 00 6 8 00 Jan 07 1 G15 6 8 00 --------------

16. Account Account Acct No. Acct No. Post Ref Post Ref Date Date Item Item Debit Debit Credit Credit BALANCE BALANCE DEBIT DEBIT CREDIT CREDIT Income Summary 3120 Dec 06 31 G14 1 6 1 3 00 1 6 1 3 00 Interest Income 7110 Dec 06 31 CR15 1 5 00 1 5 4 5 00 31 G14 6 8 00 1 6 1 3 00 31 G14 1 6 1 3 00 -------------- Jan 07 1 G15 6 8 00 6 8 00 Mar 07 16 CR16 1 7 8 00 1 1 0 00

17. Cash Receipts Journal Page ___ Doc No. Post Ref. GENERAL Sales Tax Payable Date Account Title Accts Rec. Credit Sales Credit Sales Dis. Debit Cash Debit DEBIT CREDIT Debit Credit 16 Mar 16 Notes Receivable 32 1115 3000.00 3178.00 Interest Income 7110 178.00 Assignments

18. Assignments • Do Application 24-1 by hand and turn it in. • Move on to Section 24-2.