Section 2 - Accrued Revenue Flashcards
Some examples of accrued revenue include:
- Interest earned on customer notes and investments - Interest Receivable / Interest Revenue
- Commissions and royalties - Commissions Receivable / Commissions Revenue
- Space leased - Rent Receivable / Rent Revenue
Your company has a 9-month $24,000, 11% note receivable dated June 1st.
What adjusting entry must be recorded on December 31st if no payment has been received?
When answering a question that requires you to calculate interest, remember (FAIR FOY)
(Face Amount x Interest Rate*) x Fraction Of Year
- Step 1. Multiply the Face amount (Principal) by the Interest rate to calculate Annual Interest* $24,000 * 11% = $2,640
- Step 2. Divide annual interest by 12 to calculate the monthly amount. $2,640/12 = $220
- Step 3. Multiply the monthly amount by the number of months interest has accrued $220 x 7 (June 1st - Dec 31st) = $1,540
Adjusting Entry
Interest Receivable (DR) $1,540
Interest Revenue (CR) $1,540
Note** The maturity (9-months) of the note has no significance as interest is stated on an annual basis.
If revenue is not accrued, assets will be overstated.
True or False
False. If revenue is not accrued, assets would be understated because the omitted entry would’ve increased the receivable account.
Omitted entry:
Accounts Receivable (DR) - (Entry increases Accounts Receivable)
Revenue (CR) - (Entry increases Revenue)
The journal entry to accrue $600 commissions revenue is:
Commissions Receivable (DR) $600
Commissions Revenue (CR) $600
The general entry to record accrued revenue is:
Accounts [or Other] Receivable (DR)
Revenue (CR)
Failure to make the entry to accrue revenue _____ net income.
Understates.
The entry to accrue revenue requires a debit to a Receivable, which increases assets and a credit to Revenue which increases both Revenue and Net income. If a company fails to make the required journal entry, Assets on the Balance Sheet, as well as Revenue and Net Income on the Income Statement would be understated.
As of year-end, your firm earned $7,500 for services provided but only received $3,600 which was recorded in Revenue.
By what amount must the balance in the Revenue account be adjusted at year end?
The company earned $7,500, however, only $3,600 was received and recorded. Even though the additional $3,900* was not received, it must be recorded because it was earned.
$7,500 (Amount earned)- $3,600 (Amount Received) = $3,900*
Adjusting Journal Entry
Accounts Receivable (DR) $3,900
Revenue (CR) $3,900
Failure to accrue revenue has the following effect:
Understates / Overstates / No effect
Assets
Liabilities
Revenue
Net Income
Whenever a problem asks you about the effect on the Financial Statements, think of the journal entry itself. In the case presented above, the general entry to accrue revenue requires a debit to Account Receivable which increases assets and a credit to Revenue which increases Revenue and Net Income.
If a company fails to record the entry, assets, revenue and net income would be understated.
Assets - Understates
Liabilities - No Effect
Revenue - Understates
Net Income - Understates
A company omitted its adjusting entry to accrue rental revenue.
What effect does it have on liabilities at year end?
No effect.
Whenever a problem asks you about the effect on the Financial Statements, think of the journal entry itself. In the case presented above, the general entry to accrue revenue requires a debit to Account Receivable which increases assets and a credit to Revenue which increases Revenue and Net Income. If a company fails to record the entry, assets, revenue, and net income would be understated, therefore an adjusting entry related to accrued revenue has no effect on liabilities whether the entry is made or not.
Rent Receivable appears on which Financial Statement?
Balance Sheet
All Assets, Liabilities and Owner’s Equity accounts appear on the Balance Sheet.
As a helpful aid to remember which accounts appear on the Balance Sheet, think of “ALOE vera,” a popular medicinal plant with many benefits and often helps to balance out the body.
LORI LLC holds a customer’s $2,500, 6-month note which is dated September 1st and bears interest of 15%.
As of December 31st, how much interest has accrued?
When answering a question that requires you to calculate interest, remember (FAIR FOY)
(Face Amount x Interest Rate*) x Fraction Of Year
- Step 1. Multiply the Face amount (Principal) by the Interest rate to calculate Annual Interest* $2,500 * 15% = $375 annual interest
- Step 2. Divide annual interest by 12 to calculate the monthly amount. $375/12 = $31.25 per month
- Step 3. Multiply the monthly amount, by the number of months interest, has accrued $31.25 x 4 (Sep 1st - Dec 31st) = $125.00
Adjusting Entry
Interest Receivable (DR) $125
Interest Revenue (CR) $125
The adjusting entry to accrue revenue increases the balance in the Cash ledger.
True or False
False.
If cash were received, there would be no reason to accrue revenue. To understand why, remember, the purpose of accruing revenue is to record revenue that has been earned but not yet received. Therefore, whenever cash payment has not been received, the balance in the Accounts receivable ledger is increased as a placeholder until cash is received in the future.
Note: Cash is never adjusted**
Commissions Receivable appears on which Financial Statement?
Income Statement
All Revenue and Expense accounts appear on the Income Statement.
The receipt of cash for accrued revenue takes place _______ the revenue is earned.
After.
The revenue has been earned, however, payment is received at a later date.
Every adjusting entry for accrued revenue increases assets on the Balance Sheet.
True or False
True.
The general entry to record accrued revenue debits a receivable account, increasing assets on the Balance sheet, and credits a Revenue account increasing revenue and net income on the Income Statement for that period.
Accrued Revenue Journal Entry
Accounts [or Other] Receivable (DR)
Revenue (CR)
