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Hi – I’ve hit a mental wall with a question in the Kaplan test kit.
The Q gives the separate rental income received for two properties. It then provides balances on the accrued income and prepaid expense accounts by giving a single dr and cr figure at the start and end of the period for each property. It then requires calculation of the rental income at the end of the period for the P&L
The model answer shows one T account titled rental income (for both properties) which contains both the dr and cr balance b/f on either side. It then uses the dr and cr balance c/f at the end of the period for each property along with income received during the period to identify the ‘difference’ which is the rental income for the period and which balances the T account on both sides. I can see how the answer has been reached but I don’t understand the thinking/principles behind it and why it’s been approached on one T account in this way?
It would be great to get some insight as I suspect the answer is straightforward even if not clear to me at present. I’ve revisited the lecture and still can’t see what I’m missing.
Firstly you do not really need to use a t-account – some people find it easier that way but I prefer not to.
Because it is rent received (i.e. income), accrued income is income that was owing to us at the start of the year and so will be a debt balance. Prepaid income is income for this year that had been paid to us last year, and so it will be a credit balance.
The same will happen at the end of the year.
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