Question

On October 1, Kelly Company received $25,500 for six months of rent, in advance. Kelly credited Rent Revenue, which is an alternate way of recording the initial receipt of cash. If the appropriate adjusting entry is not made at the end of the year, what will be the effect on:

Answer 1

Answer: The effect will be that the results will be distorted by registering a gain in the incorrect period, since 3 months correspond to the current year, from October-December and the rest corresponds from January-March of the following year.

The correct way to record these 3 months is as a liability (deferred income) when the income is realized they are taken to the income statement.