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. Journalizing Accrued Interest Income General Journal Page ___ DateAccount Title Post Ref. Doc. No. DebitCredit 15 Dec 31 Interest Receivable 2 0 00 Interest Income 2 0 00 Adjusting Entries

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 ___ DateAccount Title Post Ref. Doc. No. DebitCredit 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 Acct No. DateItem Post Ref DebitCredit BALANCE DEBITCREDIT Account Acct No. DateItem Post Ref DebitCredit BALANCE DEBITCREDIT Interest Receivable 1120 Interest Income 7110 Dec 31 G15 2 0 00 2 0 00 Dec 29 CR36 1 2 00 6 8 00 31 G15 2 0 00 8 8 00 31 G15 8 8 00 ___________ Jan 1 G17 2 0 00 2 0 00 Jan 1 G17 2 0 00 _______ 30 CR51 3 0 00 1 0 00 Adjusting Closing Reversing Loan Maturity Adjusting Reversing

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. Work Together p. 620 on several slides Account Title Trial BalanceAdjustments Debit Credit Worksheet Wrenn Corporation For Year Ended December 31, 2007 Interest Receivable (a) 6 8 00 Interest Income (a) 6 8 00 1 5 4 5 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 ___ DateAccount Title Post Ref. Doc. No. DebitCredit 14 Adjusting Entries Dec 06 31Interest Receivable1120 6 8 00 Interest Income7110 6 8 00 Closing Entries 31Interest Income7110 1 6 1 3 00 Income Summary3120 1 6 1 3 00 Reversing Entries Jan 07 1Interest Income7110 6 8 00 Interest Receivable1120 6 8 00 Look at postings now Start of pg G15 Look at these postings now After viewing all posts, go to Cash Receipts Journal

15. Account Acct No. DateItem Post Ref DebitCredit BALANCE DEBITCREDIT Account Acct No. DateItem Post Ref DebitCredit BALANCE DEBITCREDIT Notes Receivable1115 Interest Receivable1120 Nov16G11 3 0 0 0 00 Mar 07 16CR16 3 0 0 0 00 Dec 06 31G14 6 8 00 Jan 07 1G15 6 8 00 To GJ -------------- ------------

16. Account Acct No. DateItem Post Ref DebitCredit BALANCE DEBITCREDIT Account Acct No. DateItem Post Ref DebitCredit BALANCE DEBITCREDIT Income Summary3120 Interest Income 7110 Dec 06 31G14 1 6 1 3 00 Dec 06 31CR15 1 5 00 1 5 4 5 00 31G14 6 8 00 1 6 1 3 00 31G14 1 6 1 3 00 -------------- Jan 07 1G15 6 8 00 Mar 07 16CR16 1 7 8 00 1 1 0 00

17. Cash Receipts Journal Page ___ Date Account Title Post Ref. GENERAL DEBITCREDIT Accts Rec. Credit Sales Credit Cash Debit Doc No. Sales Tax Payable Debit Credit Sales Dis. Debit Mar 16 Notes Receivable3211153000.003178.00 Interest Income7110 178.00 16 Assignments

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