Accounting
Chapter 24
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Generally accepted accounting principles (GAAP) require that revenue and
expenses be recorded in the accounting period in which revenue is earned
and expenses incurred.
Adjusting entries are made at the end of the fiscal period for revenues
and expenses resulting from notes payable and notes receivable
Accrued Revenue: revenue earned in one fiscal period but not received
until a later fiscal period
Adjusting entry for accrued revenue increase a revenue account and a
receivable account
The income statement will then report all revenue earned for the period
even though some of the revenue has not been recorded yet
The balance sheet will report all the assets, including the accrued revenue
receivable
Section 1
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Accrued Interest Income: interest earned but not received yet
Work Sheet
o Debit Interest Receivable in the adjustment columns for the
amount of interest due for the time period that has passed
o Credit Interest Income for the same amount and label with a small
letter in a ()
Record the Adjusting Entry to the General Journal using the same
accounts
Then post this transaction to the General Ledger accounts
Debit in Interest Receivable is the accrued interest income earned but not
yet collected at the end of the fiscal period
Interest Receivable will show up on the balance sheet as a current asset
Interest Income will be on the income statement as other revenue
On December 31 Interest Income is closed into Income Summary as a
part of regular closing entry for income statement accounts with credit
balances
Reversing Entry: an entry made at the beginning of one fiscal period to
reverse an adjusting entry made in the previous fiscal period
Reversing entries are the exact opposite of an adjusting entry
An entry is made at the beginning of a new fiscal period to reverse the
Interest Receivable adjusting entry that was made at the end of the
previous fiscal period
Reversing an adjusting entry for accrued Interest Income
o Write Reversing Entries in General Journal
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Debit Interest Income
Credit Interest Receivable
Collecting a note receivable issued in a previous fiscal period – record in
CR journal
• Notes Receivable credit in general columns for principal amount
• Interest Income credit for full interest amount
• Cash debit total amount received
• Post the amounts in the General Columns of Cash Receipts journal
to ledger accounts
Section 24-2
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Accrued Expenses: expenses incurred in one fiscal period but not paid
until a later fiscal period
The adjusting entry increases an expense account and increases a payable
account
Accrued Interest Expense: interest incurred but not yet paid.
Plan the adjustment on the worksheet and then journalize to General
Journal and post to ledgers.
Debit Interest Expense and credit Interest Payable
New balance of Interest Expense is the total amount of interest expense
incurred during the fiscal period.
Interest Payable balance indicated the interest owed on December 31 that
will be paid the next fiscal year
Interest Payable account balance will show as a current liability on the
Balance Sheet
Interest Expense balance will show on the Income Statement as an other
expense
On December 31, Interest Expense is closed as part of regular closing
activities – credit Interest Expense and debit Income Summary
On January 1, need to reverse the adjusting entry – do the exact opposite
of the adjusting entry regarding Interest Expense
The reversing entry creates a credit balance in the Interest Expense – this
is the opposite of the normal balance
The reversing entry to Interest Payable reduces the balance to zero.
Paying a Note Payable signed in a previous fiscal period
• Debit Notes Payable in the General debit column of Cash Payments
journal for the principal of the note
• Debit Interest Expense in General debit column of CP journal
• Credit Cash for the full amount received.
• Post the amounts in the General columns of the CP journal to
ledgers