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ACCRUALS AND PREPAYMENTS
51 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 expense 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?
A $453,600
B $440,200
C $465,900I don’t understand the credits and debits the correct answer is A
?? thanks
We are receiving rent from tenants. So some tenants will have not paid enough and therefore owe us money as the end of the year – so a debit balance.
Other tenants will have paid in advance and so we owe them money at the end of the year – so a credit balance.For property 1, we have received cash during the year of $280,000.
However at the start of the year, there was a credit balance of 12,300 which means that we had already received money in advance last year – it is this years income.
At the end of the year there is a debit balance of 13400 which means that we are still owed rent for this year.
So the total income for the year for property 1 is 280000 + 12300 + 13400 = 305700.Have a go yourself now for Property 2 – then obviously add the two together.
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thanks but if you could possible show me what these entries look like in the prepayments expense and accruals income accounts? also what happens if the balances were accrued expenses and prepaid income?
I will, although there is never a need to use t’accounts in the exam.
In the rent receivable account, there are opening balances of 5400 DR and 12300 CR.
During the year we receive cash of 440000 in total,
So DR cash and CR rent receivable with 440000At the end of the year we want to end up with a Dr balance of 13400 and a Cr balance of 6700.
So we carry forward 13400 from the Cr side of the t’account, and carry forward 6700 from the Dr side of the t’account (they carry forward to the opposite side of the account as always).The missing figure on the Account (to make it balance) will be the total income for the year.
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I found this in comments under your lecture
“For rent expense, prepaid rent is a debit balance (because we have overpaid and so the person owes us money)”
“For rental income, prepaid rent is a credit balance (because the person renting from us has paid too much and so we owe money to them)”
OK so because this is a “rent income” account the CR balance of 12300 is a prepayment and DR an accrual?
thanks again
Yes- a credit balance is prepaid income (and is a current liability ), a debit balance is accrued income (and therefore a current asset)
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thank you john i understood
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thanks
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had to reply here because other threads are closed..
settlement discounts are included in sales tax whether settlement discount taken or not
but not included in the cost of inventory valuation but trade discounts are?&
Trade payables and Trade receivables will affect the trial balance
?
thanks
Yes – when calculating sales tax, we take into account settlement discounts whether or not they are eventually taken.
And yes, when valuing inventory we ignore settlement discounts.The balances on both payables and receivables accounts will appear in the trial balance. The trial balance is a list of all the balances on all the ledger accounts.
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thanks again!
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