Accounting 3
Chapter 24 Section 1
Accounting for Accrued Revenue and
Expenses
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.
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.
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.
Journalizing Accrued Interest Income
General Journal
Date
Account Title
Doc.
Post
No.
Ref.
15
Page ___
Debit
Credit
Adjusting Entries
Dec
31
Interest Receivable
Interest Income
2
0
00
2
0 00
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.
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.
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.
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.
General Journal
Date
Account Title
Doc.
Post
No.
Ref.
17
Page ___
Debit
Credit
Adjusting Entries
Dec
31
Interest Receivable
2
0
00
Interest Income
2
0 00
2
0 00
Reversing Entries
Jan
1
Interest Income
Interest Receivable
2
0 00
Account Interest Receivable
Date
Item
Acct No. 1120
Post
Ref
Dec 31
G15
Jan
G17
1
Debit
Credit
2 0 00
BALANCE
DEBIT
CREDIT
Adjusting
2 0 00
2 0 00
Reversing
_______
Account Interest Income
Date
Item
Acct No. 7110
Post
Ref
Debit
Credit
BALANCE
DEBIT
CREDIT
Dec 29
CR36
1 2 00
6 8 00
31
G15
2 0 00
8 8 00
31
G15
8 8 00
1
G17
2 0 00
Jan
30
CR51
___________
Closing
Reversing
2 0 00
3 0 00
Adjusting
1 0 00
Loan Maturity
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.
Work Together p. 620 on several slides
Wrenn Corporation
Worksheet
For Year Ended December 31, 2007
Account Title
Trial Balance
Debit
Adjustments
Credit
Debit
(a)
Interest Receivable
Interest Income
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.
1 5 4 5
00
Credit
6 8 00
(a)
6 8 00
General Journal
Date
Account Title
Doc.
Post
No.
Ref.
14
Page ___
Debit
Credit
Adjusting Entries
Dec 06
31 Interest Receivable
Interest Income
1120
6
8
00
7110
6 8 00
Closing Entries
31 Interest Income
Income Summary
7110
1 6
1
3 00
3120
1 6 1
3
00
Look at postings now
Start of pg G15
Reversing Entries
Jan 07
1
Interest Income
Interest Receivable
7110
1120
6
8 00
6
8
00
Look at these
postings now
After viewing all posts, go
to Cash Receipts Journal
Account
Notes Receivable
Date
Item
Nov 16
Mar 07
Acct No. 1115
Post
Ref
G11
16
Debit
Credit
3 0 0 0 00
CR16
BALANCE
DEBIT
CREDIT
3 0 0 0 00
3 0 0 0 00
------------
Account Interest Receivable
Date
Item
Acct No. 1120
Post
Ref
Dec 06
31
G14
Jan 07
1
G15
Debit
Credit
6 8 00
BALANCE
DEBIT
6 8 00
6 8 00
--------------
CREDIT
To GJ
Account Income Summary
Date
Dec 06
Item
31
Acct No.
Post
Ref
Debit
G14
Credit
BALANCE
DEBIT
CREDIT
1 6 1 3 00
1 6 1 3 00
Account Interest Income
Date
Dec 06
Item
3120
Acct No. 7110
Post
Ref
Debit
Credit
BALANCE
DEBIT
CREDIT
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
Mar 07
16
CR16
-------------6 8 00
1 7 8 00
1 1 0 00
Cash Receipts Journal
Date
Mar
Account Title
16
Notes Receivable
Interest Income
Doc
Post
No.
Ref.
32
GENERAL
DEBIT
CREDIT
1115
3000.00
7110
178.00
16
Page ___
Accts Rec.
Credit
Sales
Credit
Sales Tax Payable
Debit
Credit
Sales Dis.
Debit
Cash
Debit
3178.00
Assignments
Assignments


Do Application 24-1 by hand and turn it in.
Move on to Section 24-2.