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Leddley owns two properties which it rents to tenants. In the year ended 31 December 20X6, it received $280,000 in respect of property 1 and $160,000 in respect of property 2. Balances on the accrued income and prepaid expenses accounts were as follows:
31 December 20X6 31 December 20X5
Property 1 13,400 Dr. 12,300 Cr.
Property 2 6,700 Cr. 5,400 Dr.What amount should be credited to the statement of profit or loss for the year ended 31 December 20X6 in respect of rental income?
The solution is given in the exam kit. But I need to clear my point on Prepaid Expenses and Accrued income. From the above which are the Prepaid Expenses and Accrued income. Further, it is about rental income why we are dealing with Prepaid Expenses.
They should not have used the words ‘prepaid expenses’ – they should have called it ‘prepaid income’.
Accrued income is rent that was owing to us at the beginning and end of the year. Prepaid income is rent that had been paid to us in advance.
Mr. John, what is the treatment of Prepaid Income and in common what is the Journal Entry would be passed for it?
If there is prepaid rental income at the end of the year, then the entry is to Debit rental income (to take out the income that relates to next year), and Credit Prepaid Income (which will appear as a current liability in the SOFP because the person has effectively overpaid as at the end of the year).
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