Question

On September 1, Walker Company received $30,900 for six months of rent in advance. On September 1, Walker Company credited Rent Revenue, which is an alternate way of recording the initial receipt of cash. Required: Journalize the adjusting entry on December 31.

Answer 1

Answer:

As per accrual concept of accounting, income is recorded when it is earned and not when cash is received.

An income which is not yet earned i.e services for which are yet to be provided and yet cash is received against it in advance, such an advance receipt represents liability since services are yet to be provided.

The entry passed by Walker Company upon receipt being

Cash A/C                                                Dr. $30,900

     Rent Revenue A/C                                                $30,900

(Being six month rent received in advance recorded)

By Dec 31, Walker company has provided services for 3 months out of 6 months which meant half of the rent recorded as income upon receipt above, remained unearned as on Dec 31.

The Adjusting entry as on Dec 31, would be,

Rent Revenue A/C                                 Dr. $ 15,450

     To Unearned Rent Income                                  $15,450

(Being unearned rent income recorded)

This amount of $15,450 represents the rent received in advance which relates to three months against which services are yet to be provided i.e due.