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Hallo,
I am trying to explain to myself, as per the below example:
“A tenant pays us rent of $1,000 a month. At the year-end he had paid 3 months in advance. During the year,
$16,000 was received. What was in our last year’s statement of financial position in respect of this tenant?”The answer is:
Rent received a/c
Dr 1000
Dr 3000
Dr I/S 12000
Cr 16000– how do I know that we debit only 1000 for one month, and not for 9 months, or not full 12 months, what tells me that, I don’t see anywhere in the text any period mentioned, how do I judge what period is meant?
Thank you!
MP
Firstly, if you were doing this in the exam then you would be wasting time preparing a t-account (and your workings would not be looked at). If the rent is 1000 per month, then the income for the year is 12,000.
However, you are told that he had paid 3 months in advance – that means that we should have received a total of 15,000.
Since we received 16,000 it must mean that we had been owed 1,000 at the end of last year (and so received the cash this year).
So for the t-account we would start with a debit balance of 1000 (the amount we were owed at the start of the year.
We would then credit the account with 16,000 (the cash we had received)At the end of the year we need to account for the payment in advance, and so we debit rent received and prepaid income account (credit because at the end of the year we effectively owe the overpayment back to the tenant).
That leaves a ‘missing figure’ on the account of 12,000 which is the income for the year, that goes to the income statement.
Hallo,
Thank you very much for the complete answer.
I wasn’t sure what the $1000 were for.
May I ask, to complete my view of this example, let’s say next period the $3000 is already earned, would the entries to recognize it be like that:
Dr Prepaid income a/c (liability) / SFP 3000
Cr Rent received (asset)/ I/S 3000Thank you!
Yes – that would be the entry
(although rent received is income not asset!)Thank you very much!
Yes, I confused it with the income receivable at first, and thought it was an asset, but when it’s already received it should be treated as income.
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