1. Accounting Practices 501 Chapter 8 Balance Day Adjustments (Income in advance & Accrued income) Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

2. Income in advance Ch8C - Income in advance & Accrued income 2 This is income already received, but which has not yet been earned Dr Rent income 30,000 Additional information Rent income includes $2,000 received for April (following period) Extract from Trial Balance as at 31 March Cr

3. Income in advance Ch8C - Income in advance & Accrued income 3 This is income already received, but which has not yet been earned Dr Rent income Additional information Rent income includes $2,000 received for April (following period) Extract from Trial Balance as at 31 March Cr At balance date (31 March), we have to adjust the Rent income (take out April’s rent of $2,000) (-2,000) 30,000

4. Income in advance Ch8C - Income in advance & Accrued income 4 This is income already received, but which has not yet been earned Dr Rent income 28,000 Additional information Rent income includes $2,000 received for April (following period) Extract from Trial Balance as at 31 March Cr (-2,000) Although we have already received the $2,000, we have not yet earned it.

5. Income in advance Ch8C - Income in advance & Accrued income 5 This is income already received, but which has not yet been earned Dr Rent income Additional information Rent income includes $2,000 received for April (following period) Extract from Trial Balance as at 31 March Cr (-2,000) We now create a Current Liability called Income in Advance (+2,000) Let’s do the General Journal entry Income in advance 2,000 28,000

6. Income in advance Ch8C - Income in advance & Accrued income 6 This is income already received, but which has not yet been earned Dr Rent income Extract from Trial Balance as at 31 March Cr (-2,000) (+2,000) Income in advance 2,000 General Journal Date Account Titles Ref noDebitCredit 31/3 Rent Income2,000 Income in advance (Rent) 2,000 Being entry to record Rent received in advance 28,000

7. Let’s look at the financial statements Ch8C - Income in advance & Accrued income 7 The Rent Income will be classified as Other Income in the Income Statement The Income in Advance will be classified as a Current Liability in the Balance Sheet We will only be preparing an extract from each statement showing only the relevant items

8. Ch8C - Income in advance & Accrued income 8 Extract from the Income Statement for the year ended …….. ………. Add Other Income Rent Income$28,000 Extract from the Balance Sheet as at … ………. Current Liabilities Income in advance$2,000 (30,000 – 2,000)

9. Accrued Income Ch8C - Income in advance & Accrued income 9 This is income that has been earned in the current accounting period, but has not yet been received Dr Interest income 5,000 Extract from Trial Balance as at 31 March Cr Additional information Interest income of $1,500 is still outstanding at balance date

10. Accrued Income Ch8C - Income in advance & Accrued income 10 This is income that has been earned in the current accounting period, but has not yet been received Dr Interest income Extract from Trial Balance as at 31 March Cr Additional information Interest income of $1,500 is still outstanding at balance date 5,000 At balance date (31 March), we have to adjust the Interest income (add the outstanding Interest of $1,500 to get the total Interest for the year) (+1,500)

11. Accrued Income Ch8C - Income in advance & Accrued income 11 This is income that has been earned in the current accounting period, but has not yet been received Dr Interest income 6,500 Extract from Trial Balance as at 31 March Cr Additional information Interest income of $1,500 is still outstanding at balance date (+1,500) We have not yet received the $1,500 and if we had received it, it would have been in the Bank, which is a Current Asset.

12. Accrued Income Ch8C - Income in advance & Accrued income 12 This is income that has been earned in the current accounting period, but has not yet been received Dr Interest income 6,500 Extract from Trial Balance as at 31 March Cr Additional information Interest income of $1,500 is still outstanding at balance date (+1,500) Accrued Income 1,500 We now create a Current Asset called Accrued Income Let’s do the General Journal entry

13. Accrued Income Ch8C - Income in advance & Accrued income 13 This is income that has been earned in the current accounting period, but has not yet been received Dr Interest income 6,500 Extract from Trial Balance as at 31 March Cr (+1,500) Accrued Income General Journal Date Account Titles Ref noDebitCredit 31/3 Accrued Income (Interest)1,500 Interest income 1,500 Being entry to accrue Interest income 1,500

14. Let’s look at the financial statements Ch8C - Income in advance & Accrued income 14 The Interest Income will be classified as Other Income in the Income Statement The Accrued Income will be classified as a Current Asset in the Balance Sheet We will only be preparing an extract from each statement showing only the relevant items

15. Ch8C - Income in advance & Accrued income 15 Extract from the Income Statement for the year ended …….. ………. Add Other Income Interest Income$6,500 Extract from the Balance Sheet as at … ………. Current Assets Accrued Income$1,500 (5,000 + 1,500)