TETRA IMAGES/GETTY IMAGES
C H A P T E R
2 1
Accounting for Accrued
Revenue and Expenses
O B J E C T I V E S
After studying Chapter 21, you will be able to:
1. Define accounting terms related to accrued
revenue and accrued expenses.
2. Identify accounting concepts and practices
related to accrued revenue and accrued
expenses.
K E Y
• accrued revenue
• intellectual property
3. Record adjusting, closing, and reversing entries
for accrued revenue.
4. Record adjusting, closing, and reversing entries
for accrued expenses.
T E R M S
• accrued interest income
• reversing entry
• accrued expenses
• accrued interest expense
(
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614
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)
ACCOUNTING IN THE REAL WORLD
USA Today
You’ve probably heard someone use the phrase “timing is everything.” This
phrase has a special meaning to the accountants at USA Today, a division of
Gannett Co., Inc.
USA Today collects fees for advertising before the advertisements appear.
Customers pay subscriptions for paper delivery or online editions as much
as a year in advance. Receiving these fees does not, however, mean that
USA Today can record the amounts as current revenue. In accordance with
generally accepted accounting principles, advertising fees are recorded as
revenue when the advertising is printed or placed on a
web site. In the same manner, subscription fees
are recorded as revenue when purchased
newspapers are delivered.
When preparing financial statements, accountants at USA Today
must analyze the money collected from advertising and
subscriptions to determine
what amount should be
recorded as revenue.
DIGITAL VISION/GETTY IMAGES
Deferred Revenue at USA Today
INTERNET
ACTIVITY
Mission Statements
Go to the homepage for Ben
and Jerry’s Ice Cream (www.
benandjerrys.com). Search for
Ben and Jerry’s Mission Statement.
Instructions
©JAY CARRIER/BLOOMBERG NEWS/LANDOV
1. List Ben and Jerry’s Mission
Statement in full.
2. Expand your search by
reading about Ben and
Jerry’s commitment to
the environment. List one
interesting fact that you
find.
Critical Thinking
1. Suppose you purchase a $150.00 annual subscription to USA Today on
November 1. How much should USA Today recognize as revenue on its
December financial statements?
2. Would your answer to question 1 differ if the customer selected online
delivery of USA Today?
Source: http://library.corporate-ir.net/library/84/846/84662/items/233865/06AnnualReport.pdf
615
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
L E S S O N
Accrued Revenue
21-1
ACCOUNTING FOR INTE REST
AT T H E F I S C A L Y E A R E N D
Generally accepted accounting principles (GAAP) require
that revenue and expenses be recorded in the accounting period in which revenue is earned and expenses are
incurred. [CONCEPT: Matching Expenses with Revenue] Some revenues, however, are earned each day but
are usually recorded only when cash is actually received.
For example, interest is earned for each day a note receivable is held.
However, the interest may not be received until the
maturity date of the note. Likewise, some expenses may
be incurred before they are actually paid. A note payable
incurs interest expense each day the note is outstanding.
However, the interest generally is not paid until the note’s
maturity date. At the end of the fiscal period, adjusting
entries are recorded for these revenues and expenses.
Revenue earned in one fiscal period but not received
until a later fiscal period is called accrued revenue. At
the end of a fiscal period, accrued revenue is recorded by
an adjusting entry. [CONCEPT: Realization of Revenue]
The adjusting entry for accrued revenue increases a revenue account. The adjusting entry also increases a receivable account. The income statement will then report all
revenue earned for the period, even though some of the
revenue has not yet been received. The balance sheet will
report all the assets, including the accrued revenue receivable. [CONCEPT: Adequate Disclosure]
CHARACTER COUNTS
G u a r d i ng Int e l l e c t u a l P r o pe r t y
616
Chapter 21
are examples of intellectual property. Regardless of how
individuals attempt to justify downloading free music
from the Internet, there is no escaping the fact that these
downloads are illegal.
Businesses recognize that the unauthorized copying of
computer software is also illegal. Many companies address
this issue in their code of conduct.
Instructions
Do an Internet search to access “Everyday Values,” the code
of conduct for Harley-Davidson, Inc. What guidance does
Harley-Davidson provide its employees about copying
software for both business and personal use?
Source: http://investor.harley-davidson.com/downloads/CG_
CodeConduct.pdf.
Accounting for Accrued Revenue and Expenses
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
PHOTO: BLEND IMAGES/GETTY IMAGES
Is it ethical to download free music
from the Internet? This hotly debated
issue provides interesting insight
into our society and individuals’
ability to make ethical decisions. Have you heard people
attempt to justify copying
music? “It doesn’t cost the artists anything.” “They’re so rich
anyway.” “I can’t afford to purchase the music I like.” “If it’s on
the Internet, I can download it.”
Any product that is protected
by patents, trademarks, and copyrights is called intellectual property.
Music, videos, and computer software
A N A LY Z I N G A N A D J U S T M E N T F O R
ACCRUED INTE REST INCOME
1. Debit Interest Receivable.
2. Credit Interest Income.
Restaurant Supply Co.
Work Sheet
For Year Ended December 31, 20-1
2
3
TRIAL BALANCE
4
5
ADJUSTMENTS
6
7
INCOME STATEMENT
8
BALANCE SHEET
ACCOUNT TITLE
DEBIT
4
51
CREDIT
DEBIT
1
Interest Receivable
Interest Income
(a)
CREDIT
DEBIT
CREDIT
2 0 00
1 5 6 00
2
3
Adjusting Entries
20-Dec. 31 Interest Receivable
Interest Income
At the end of each fiscal period, Restaurant Supply examines the notes receivable on hand. The amount of interest
income earned but not yet collected is calculated. Interest earned but not yet received is called accrued interest
income. On December 31, Restaurant Supply has one
note receivable on hand, a 90-day, 6%, $2,000.00 note
dated November 1. An adjusting entry must be made
to record the amount of interest earned to date on this
note.
The time period from November 1 through December
31 is 60 days. Therefore, the interest earned on the note is
calculated for 60/360 of a year.
Time as
Accrued
Interest
ⴛ Fraction ⴝ Interest
Rate
of Year
Income
60
$2,000.00 ⫻ 6% ⫻
$20.00
⫽
360
Principal ⴛ
Interest Receivable
Dec. 31 Adj.
DOC. POST.
NO.
REF.
Accrued Revenue
DEBIT
15
CREDIT
2 0 00
2
2 0 00
3
Interest Receivable is debited for $20.00 to show the
interest income that has accrued at the end of the fiscal
period. This revenue will not be collected until the next
fiscal period.
The credit of $20.00 is added to the previous balance
in Interest Income. The new account balance, $156.00,
is the total amount of interest income earned during the
fiscal period.
S T E P S
RECORDING AN
ADJUSTMENT
FOR ACCRUED
INTEREST INCOME
1
Write the accrued interest income amount,
$20.00, in the Adjustments Debit column on the
Interest Receivable line of the work sheet. Label
the adjustment with a small letter a in parentheses, (a).
2
Write the same amount, $20.00, in the Adjustments Credit column on the Interest Income line
of the work sheet. Label the adjustment using
the same letter, (a).
3
Use the debit and credit amounts on the work
sheet to record an adjusting entry in the general
journal.
Interest Income
136.00
20.00
156.00)
PAGE
1
20.00
Dec. 31 Bal.
Dec. 31 Adj.
(New Bal.
51
3. Record the adjusting entry.
GENERAL JOURNAL
ACCOUNT TITLE
4
2
2 0 00
3
1
CREDIT
2 0 00
(a)
1 3 6 00
DATE
DEBIT
Lesson 21-1
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
617
POSTING AN ADJUSTING ENTRY FOR
ACCRUED INTE REST INCOME
GENERAL JOURNAL
DATE
1
2
3
PAGE
DOC. POST.
NO.
REF.
ACCOUNT TITLE
Adjusting Entries
20-Dec. 31 Interest Receivable
Interest Income
DEBIT
15
CREDIT
1
1120
7110
2 0 00
2
2 0 00
3
4
4
5
5
1. Post the
debit.
ACCOUNT
1
Interest Receivable
DATE
20--
Dec. 31
ACCOUNT
DATE
Dec. 29
31
G15
BALANCE
DEBIT
CREDIT
DEBIT
2 0 00
CREDIT
2 0 00
Interest Income
ITEM
1120
ACCOUNT NO.
POST.
REF.
ITEM
2. Post the
credit.
2
ACCOUNT NO.
POST.
REF.
BALANCE
DEBIT
CREDIT
DEBIT
CR36
G15
The adjustment for accrued interest income planned on
a work sheet is recorded as an adjusting entry in a general
journal. The adjusting entry is then posted to the general
ledger.
After posting, the interest receivable account has a debit
balance of $20.00 and will appear on the balance sheet as
a current asset. This debit balance is the accrued interest
income earned but not yet collected at the end of the year.
The interest income account has a credit balance
of $156.00 and will appear on the income
statement as other revenue. This amount
is the total interest income for the year.
7110
1 2 00
2 0 00
S T E P S
CREDIT
1 3 6 00
1 5 6 00
POSTING AN
ADJUSTING ENTRY
FOR ACCRUED
INTEREST INCOME
1
Post the debit, $20.00, to Interest Receivable.
2
Post the credit, $20.00, to Interest Income.
R E M E M B E R
The interest receivable account
appears in the Current Assets section
of the balance sheet. The interest
income account appears in
the Other Revenue section of
the income statement.
618
Chapter 21
Accounting for Accrued Revenue and Expenses
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
REVE RSING E NTRY FOR ACCRUE D INTE REST INCOME
1. Write the heading.
2. Debit Interest Income.
GENERAL JOURNAL
DATE
1
20--
2
3
Jan.
ACCOUNT TITLE
1 Reversing Entries
1 Interest Income
Interest Receivable
PAGE
DOC. POST.
NO.
REF.
DEBIT
17
CREDIT
1
2 2 0 00
2
3 2 0 00
4
3
4
3. Credit Interest Receivable.
On December 31, Interest Income is closed as part of the
regular closing entry for income statement accounts with
credit balances. Interest Income is debited for $156.00 to
reduce the account balance to zero.
Adjusting entries for accrued revenues have an effect on
transactions that will be recorded in the following fiscal
period. On the maturity date of the outstanding 90-day
note receivable, Restaurant Supply will receive interest of
$30.00.
However, an adjusting entry was made to record the
amount of interest earned last year, $20.00. Thus, $20.00
of the $30.00 total interest income has already been
recorded as revenue. The remaining $10.00 of the $30.00
total interest will be earned during the current fiscal
period.
It is inconvenient to determine how much, if any,
of cash received from notes receivable relates to interest accrued during the prior fiscal period. To avoid this
inconvenience, an entry is made at the beginning of the
new fiscal period to reverse the adjusting entry. An entry
made at the beginning of one fiscal period to reverse an
adjusting entry made in the previous fiscal period is called
a reversing entry.
S T E P S
Interest Income
Dec. 31 Closing
Jan. 1 Rev.
(New Bal.
156.00
20.00
20.00)
Dec. 31 Bal.
Dec. 31 Adj.
136.00
20.00
Interest Receivable
Dec. 31 Adj.
(New Bal. zero)
20.00
Jan. 1 Rev.
20.00
The reversing entry is the opposite of the adjusting
entry. The entry creates a debit balance of $20.00 in Interest Income. A debit balance is the opposite of the normal balance of Interest Income. When the full amount of
interest is received, the $30.00 will be credited to Interest Income, resulting in a $10.00 credit balance ($30.00
credit ⫺ $20.00 debit), the amount of interest earned in
the new year.
The reversing entry reduced the balance in Interest
Receivable to zero. When the interest is received, no entry
will be made to Interest Receivable. Instead, the total
amount of interest received will be credited to Interest
Income.
REVERSING AN ADJUSTING ENTRY FOR ACCRUED
INTEREST INCOME
1
Write the heading, Reversing Entries, in the middle of the general journal’s Account Title column. This heading
explains all the reversing entries that follow. Therefore, indicating a source document is unnecessary.
2
Record a debit, $20.00, to Interest Income.
3
Record a credit, $20.00, to Interest Receivable.
Accrued Revenue
Lesson 21-1
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619
CO L L E C T I N G A N OT E R E C E I VA B L E I S S U E D
IN A PREVIOUS FISCAL PERIOD
1. Credit for Principal
3. Debit for Maturity Value
CASH RECEIPTS JOURNAL
1
DATE
22
23
DOC. POST.
NO. REF.
ACCOUNT TITLE
4
5
CREDIT
ACCOUNTS
RECEIVABLE
CREDIT
SALES
CREDIT
SALES TAX
PAYABLE
CREDIT
51
7
SALES
DISCOUNT
DEBIT
1 2 0 0 0 00
R9 1115
7110
30 Notes Receivable
Interest Income
3
GENERAL
DEBIT
PAGE
6
2
CASH
DEBIT
3 2 0 3 0 00
3 0 00 2
22
23
24
24
2. Credit for Total Interest
ACCOUNT
Notes Receivable
DATE
ITEM
Nov. 1
20-Jan. 30
ACCOUNT
BALANCE
POST.
REF.
G11
CR51
DEBIT
CREDIT
DEBIT
4
2 0 0 0 00
ITEM
31
31
20-Jan. 1
30
2 0 0 0 00
POST.
REF.
G15
G16
G17
CR51
January 30. Received cash for the maturity value
of a 90-day, 6% note: principal, $2,000.00, plus
interest, $30.00; total, $2,030.00. Receipt No. 9.
DEBIT
2 0 00
1 5 6 00
2 0 00
———
2 0 00
4 3 0 00
Jan. 30 Rec’d
2,000.00
620
Chapter 21
156.00 Dec. 31 Bal.
20.00 Dec. 31 Adj.
Jan. 30 Rec’d
(New Bal.
136.00
20.00
30.00
10.00)
1 5 6 00
———
1 0 00
COLLECTING A
NOTE RECEIVABLE
ISSUED IN A
PREVIOUS FISCAL
PERIOD
1
Record a credit to Notes Receivable in the General Credit column of the cash receipts journal
for the principal of the note, $2,000.00.
2
Record a credit to Interest Income in the General
Credit column for the total interest, $30.00.
3
Record a debit in the Cash Debit column for the
maturity value of the note, $2,030.00.
4
Post the amounts in the General columns.
Interest Income
Dec. 31 Closing
Jan. 1 Rev.
CREDIT
The total interest, $30.00, was earned during two fiscal periods—$20.00 during the previous fiscal period and
$10.00 during the current fiscal period. The reversing
entry created a $20.00 debit balance in Interest Income.
After the $30.00 credit is posted, Interest Income has a
credit balance of $10.00, the amount of interest earned
during the current fiscal period.
Notes Receivable
2,000.00
7110
CREDIT
S T E P S
2,030.00
4. Post amounts
in General
columns.
BALANCE
DEBIT
Cash
Nov. 1
———
ACCOUNT NO.
On January 30, Restaurant Supply received the maturity
value of the only note receivable on hand on December
31, the end of the previous fiscal year.
Jan. 30 Rec’d
CREDIT
2 0 0 0 00
———
Interest Income
DATE
1115
ACCOUNT NO.
Accounting for Accrued Revenue and Expenses
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
End of Lesson
REVIEW
TERMS REVIEW
AUDIT YOUR UNDERSTANDING
accrued revenue
intellectual property
accrued interest income
reversing entry
1. Which accounting concept is being applied when an adjusting entry is
made at the end of the fiscal period to record accrued revenue?
2. Why does a business use reversing entries as part of its procedures for
accounting for accrued interest income?
WORK TOGETHER 211
Journalizing and posting entries for accrued revenue
The accounting forms for the following problem are in the Working Papers. Your instructor will guide you through
the following examples.
On December 31 of the current year, Marris Corporation has one note receivable outstanding, a 120-day, 12%,
$4,000.00 note dated November 16.
1. Plan the adjustment on a work sheet. Label the adjustment (a).
2. Journalize and post the adjusting entry for accrued interest income on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest income using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest income on page 15 of a general journal.
5. Journalize the receipt of cash for the maturity value of the note on March 16, Receipt No. 32. Use page 16 of a
cash receipts journal. Post the amounts in the General columns.
ON YOUR OWN 211
Journalizing and posting entries for accrued revenue
The accounting forms for the following problem are in the Working Papers. Work this problem independently.
On December 31 of the current year, ExMark, Inc., has one note receivable outstanding, a 90-day, 10%, $6,000.00
note dated December 1.
1. Plan the adjustment on a work sheet. Label the adjustment (a).
2. Journalize and post the adjusting entry for accrued interest income on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest income using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest income on page 15 of a general journal.
5. Journalize the receipt of cash for the maturity value of the note on March 1, Receipt No. 65. Use page 19 of a cash
receipts journal. Post the amounts in the General columns.
Accrued Revenue
Lesson 21-1
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
621
L E S S O N
Accrued Expenses
21-2
A N A LY Z I N G A N A D J U S T M E N T F O R
ACCRUE D INTE REST EXPE NSE
2. Credit Interest Payable.
Restaurant Supply Co.
Work Sheet
For Year Ended December 31, 20-1
2
3
ACCOUNT TITLE
15
Interest Payable
52
Interest Expense
DEBIT
4
5
ADJUSTMENTS
TRIAL BALANCE
DEBIT
CREDIT
CREDIT
(h)
(h)
6 0 0 00
1
6
7
INCOME STATEMENT
DEBIT
CREDIT
DEBIT
4 0 0 00
1 0 0 0 00
1. Debit Interest Expense.
3
3. Record the adjusting entry.
Time as
Accrued
Interest
ⴛ Fraction ⴝ Interest
Rate
of Year
Expense
120
$10,000.00 ⫻ 12% ⫻
$400.00
⫽
360
622
Chapter 21
DEBIT
15
CREDIT
1
31 Interest Expense
Interest Payable
Expenses incurred in one fiscal period but not paid until a
later fiscal period are called accrued expenses. At the end
of a fiscal period, accrued expense is recorded by an adjusting entry. [CONCEPT: Matching Expenses with Revenue] The adjusting entry increases an expense account.
The adjusting entry also increases a payable account.
Interest incurred but not yet paid is called accrued
interest expense. On December 31, Restaurant Supply has one note payable outstanding, a 180-day, 12%,
$10,000.00 note dated September 2. Restaurant Supply
owes $400.00 interest for the 120 days from September 2
through December 31.
Principal ⴛ
PAGE
Adjusting Entries
1
17
DOC. POST.
NO.
REF.
ACCOUNT TITLE
15
52
GENERAL JOURNAL
16
CREDIT
4 0 0 00 2
4 0 0 00
DATE
8
BALANCE SHEET
4 0 0 00
16
4 0 0 00
17
Interest Expense
Dec. 31 Bal.
Dec. 31 Adj.
(New Bal.
600.00
400.00
1,000.00)
Interest Payable
Dec. 31 Adj.
400.00
Interest Expense is debited for $400.00 to show the
increase in the balance of this other expense account.
The new balance of Interest Expense, $1,000.00, is the
total amount of interest expense incurred during the fiscal
period.
The credit to Interest Payable creates a $400.00 account
balance that represents the interest owed on December 31
that will be paid in the next fiscal period.
Accounting for Accrued Revenue and Expenses
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
POSTING AN ADJUSTING ENTRY FOR
ACCRUE D INTE REST EXPE NSE
GENERAL JOURNAL
DATE
PAGE
DOC. POST.
NO.
REF.
ACCOUNT TITLE
DEBIT
15
CREDIT
Adjusting Entries
1
1
8105
2110
31 Interest Expense
Interest Payable
16
17
4 0 0 00
16
4 0 0 00
17
18
18
19
19
20
20
1. Post the
debit.
ACCOUNT
1
Interest Payable
DATE
20--
Dec . 31
DATE
CREDIT
DEBIT
Dec. 21
31
CREDIT
4 0 0 00
Interest Expense
ITEM
2110
BALANCE
DEBIT
G15
ACCOUNT
2. Post the
credit.
2
ACCOUNT NO.
POST.
REF.
ITEM
2
POST.
REF.
CP36
G15
4 0 0 00
ACCOUNT NO.
8105
BALANCE
DEBIT
CREDIT
DEBIT
7 5 00
4 0 0 00
CREDIT
6 0 0 00
1 0 0 0 00
The adjustment for accrued interest expense planned on
POSTING AN
a work sheet is recorded as an adjusting entry in a general
ADJUSTING ENTRY
journal. The adjusting entry is then posted to the general
S T E P S
FOR ACCRUED
ledger.
INTEREST EXPENSE
After posting, the interest payable account has a credit
balance of $400.00 and will appear on the December 31
1
Post the debit, $400.00, to Interest Expense.
balance sheet as a current liability. This credit balance is the accrued interest expense incurred
2
Post the credit, $400.00, to Interest
but not yet paid at the end of the year.
R E M E M B E R
Payable.
The interest expense account has a
The adjusting entry for accrued
debit balance of $1,000.00 and will
interest expense affects both the
appear on the income statement for
income statement and the balance
the year ended December 31 as an
sheet. The income statement will
report all expenses for the period even
other expense. This amount is the
though some of the expenses have
total interest expense for the year.
not yet been paid. The balance sheet
will report all liabilities, including
the accrued expenses payable.
(CONCEPT: Adequate
Disclosure)
Accrued Expenses
Lesson 21-2
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
623
REVE RSING E NTRY FOR ACCRUE D INTE REST EXPE NSE
GENERAL JOURNAL
DATE
1
4
5
ACCOUNT TITLE
PAGE
DOC. POST.
NO.
REF.
DEBIT
17
CREDIT
Reversing Entries
1
1 Interest Payable
Interest Expense
1 4 0 0 00
4
2 4 0 0 00
6
6
1. Debit Interest Payable.
On December 31, Interest Expense is closed as part of
the regular closing entries. Interest Expense is credited for
$1,000.00 to reduce the account balance to zero. After
the closing entry is posted, the interest expense account
is closed.
Adjusting entries for accrued expenses have an effect on
transactions to be recorded in the following fiscal period.
For example, on the maturity date of the note payable on
March 1, Restaurant Supply will pay the note’s maturity
value, including interest of $600.00.
Time as
Interest
Fraction
Principal ⴛ
ⴛ
ⴝ
Rate
of Year
120
$10,000.00 ⫻ 12% ⫻
⫽
360
Accrued
Interest
Expense
$400.00
However, an adjusting entry was made to record the
amount of accrued interest expense last year, $400.00.
Thus, $400.00 of the $600.00 total interest expense was
incurred and recorded in the previous year. The remaining
$200.00 was incurred during the current year.
Determining how much of the cash paid is for accrued
interest expense and how much applies to the current
year is an inconvenience. To avoid this inconvenience, a
reversing entry is made at the beginning of the new fiscal
period.
S T E P S
624
2. Credit Interest Expense.
Interest Payable
Jan. 1 Rev.
400.00
Dec. 31 Adj.
(New Bal. zero)
400.00
Interest Expense
Dec. 31 Bal.
Dec. 31 Adj.
600.00
400.00
Dec. 31 Closing
Jan. 1 Rev.
(New Bal.
1,000.00
400.00
400.00)
The reversing entry is the opposite of the adjusting
entry. The entry creates a credit balance of $400.00 in
Interest Expense. A credit balance is the opposite of the
normal balance of the interest expense account. When the
full amount of interest is paid, $600.00, this amount will
be debited to Interest Expense. The account will then have
a debit balance of $200.00 ($600.00 debit – $400.00
credit), the amount of interest expense incurred in the
new year.
The reversing entry to Interest Payable reduces that
account to a zero balance. Thus, when the interest is paid,
no debit entry will be required to recognize payment of
the balance of Interest Payable. The total amount of interest paid will be debited to Interest Expense.
REVERSING AN ADJUSTING ENTRY FOR
ACCRUED INTEREST EXPENSE
1
Record a debit, $400.00, to Interest Payable in the general journal.
2
Record a credit, $400.00, to Interest Expense.
Chapter 21
5
Accounting for Accrued Revenue and Expenses
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
P AY I N G A N O T E P AYA B L E S I G N E D I N
A PREVIOUS FISCAL PERIOD
1. Debit for Principal
CASH PAYMENTS JOURNAL
1
DATE
21
22
CK.
NO.
ACCOUNT TITLE
1 Notes Payable
Interest Expense
DEBIT
1 0 0 0 0 00
6 0 0 00
4
5
CREDIT
ACCOUNTS
PAYABLE
DEBIT
PURCHASES
DISCOUNT
CREDIT
CASH
CREDIT
1
1 0 6 0 0 00
2
3
2. Debit for Total Interest
ACCOUNT
Notes Payable
DATE
Sept.
20-Mar.
ACCOUNT NO.
2
1
DEBIT
DEBIT
ITEM
10 0 0 0 00
———
DEBIT
DEBIT
4 0 0 00
1 0 0 0 00
4 0 0 00
6 0 0 00 4
1 0 0 0 00
———
600.00
400.00
600.00
200.00)
Dec. 31 Closing
Jan. 1 Rev.
1,000.00
400.00
Record a debit to Notes Payable in the General
Debit column for the principal of the note,
$10,000.00.
2
Record a debit to Interest Expense in the General
Debit column for the total interest, $600.00.
3
Record a credit to Cash in the Cash Credit
column for the maturity value of the note,
$10,600.00.
4
Post the amounts in the General columns.
Cash
Mar. 1 Paid
Accrued Expenses
10,600.00
PAYING A NOTE
PAYABLE SIGNED
IN A PREVIOUS
FISCAL PERIOD
1
Interest Expense
Dec. 31 Bal.
Dec. 31 Adj.
Mar. 1 Paid
(New Bal.
———
4 0 0 00
and $200.00 during the current fiscal period. The reversing entry created a $400.00 credit balance in Interest
Expense. After the $600.00 debit is recorded, Interest
Expense has a debit balance of $200.00, the amount of
interest expense incurred during the current fiscal period.
Notes Payable
10,000.00
CREDIT
2 0 0 00
S T E P S
Sept. 2
8105
CREDIT
The total interest, $600.00, was incurred during two
fiscal periods—$400.00 during the previous fiscal period
10,000.00
4. Post amounts in
General columns.
BALANCE
POST.
REF.
March 1. Paid cash for the maturity value of the
September 2 note: principal, $10,000.00, plus
interest, $600.00; total, $10,600.00. Check No. 916.
Mar. 1 Paid
2105
ACCOUNT NO.
G15
G16
G17
CP55
31
31
20-Jan. 1
Mar. 1
3. Credit for Maturity Value
CREDIT
———
Interest Expense
DATE
22
CREDIT
CR28
1 0 0 0 0 00
CP55 10 0 0 0 00 4
ACCOUNT
21
BALANCE
POST.
REF.
ITEM
55
3
GENERAL
POST.
REF.
916 2105
8105
PAGE
2
Lesson 21-2
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625
EFFECT OF NOT USING REVERSING ENTRIES
adjusting entry creates a balance in an asset or liability
account that initially had a zero balance.
PHOTOGRAPHER’S CHOICE RF/GETTY IMAGES
If Restaurant Supply did not use a reversing entry for
accrued interest expense, $400.00 of the interest would
be reported twice. The $400.00 amount is recorded once
as an adjusting entry to Interest Expense in the previous
fiscal period. The amount is recorded a second time as
part of the $600.00 debit to Interest Expense in the current fiscal period when the note is paid.
The double charge might be avoided if accounting personnel are careful to divide the interest amount when the
note is paid. The part of the interest chargeable to the
previous fiscal period, $400.00, would be recorded as a
debit in Interest Payable. The part chargeable to the current fiscal period, $200.00, is recorded as a debit in Interest Expense.
Restaurant Supply prefers to use reversing entries.
Restaurant Supply’s accounting personnel do not have to
remember to check an entry each time a note is paid to
determine if interest should be divided. Restaurant
Supply, like other companies that use reversing
entries, records a reversing entry whenever an
BUSINESS STRUCTURES
S e l l i n g a C or po r a t i o n’s S t o c k
626
Chapter 21
A corporation’s existing stock is sold by another means.
Stock that has already been issued and sold may be sold
again by whoever owns it. This is generally done through
a stockbroker who buys and sells stock in a stock market.
In the United States, the two national stock exchanges are
the New York Stock Exchange (www.nyse.com) and the
American Stock Exchange (www.amex.com). There are
also regional stock exchanges in several large cities, such
as Chicago and Philadelphia. In addition, Nasdaq (www.
nasdaq.com) is a network of brokers who trade securities.
Critical Thinking
1. Do you think that issuing new stock is a guaranteed
method of acquiring new funds? Why or why not?
2. Select a major corporation and study its stock listings
in the newspaper or on the Internet for several days or
weeks. What trends do you notice?
Accounting for Accrued Revenue and Expenses
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PHOTO: PHOTODISC/GETTY IMAGES
Many small corporations are owned by a
few individuals, the original investors who
founded the corporation. Sometimes these corporations require greater investments in order to
expand to meet the needs of the marketplace or
to achieve greater success. One way for a corporation
to expand is to make a public offering of its stock. When
a corporation issues new stock and the public buys it, the
corporation receives the additional investment, minus any
commissions, legal fees, and other costs of issuing stock.
New offerings of stock are usually sold by investment
bankers who have expertise in new stock offerings.
A public corporation which already has stock issued
that is owned by the general public can also issue additional shares of stock to the public to attract funds for
expansion, new product offerings, research, and many
other purposes.
New stock offerings are sold in what is called primary
markets and usually require the services of an investment
banker.
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
TERMS REVIEW
accrued expenses
accrued interest expense
1. Why should accrued expenses be recorded by an adjusting entry before
financial statements are prepared at the end of a fiscal period?
2. What accounts are affected, and how, by the reversing entry for accrued
interest expense?
WORK TOGETHER 212
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers. Your instructor will guide you through the following examples.
On December 31 of the current year, Powers Corporation has one note payable outstanding, a 90-day, 12%,
$2,000.00 note dated December 1.
1. Plan the adjustment on a work sheet. Label the adjustment (h).
2. Journalize and post the adjusting entry for accrued interest expense on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest expense on page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest expense on page 15 of a general journal.
5. Journalize the payment of cash for the maturity value of the note on March 1, Check No. 543. Use page 25 of a
cash payments journal. Post the amounts in the General columns.
ON YOUR OWN 212
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers. Work this problem independently.
On December 31 of the current year, Latham Industries has one note payable outstanding, a 180-day, 9%, $5,000.00
note dated October 17.
1. Plan the adjustment on a work sheet. Label the adjustment (h).
2. Journalize and post the adjusting entry for accrued interest expense on December 31. Use page 14 of a general
journal.
3. Journalize and post the closing entry for interest expense using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest expense on page 15 of a general journal.
5. Journalize the payment of cash for the maturity value of the note on April 15, Check No. 668. Use page 30 of a
cash payments journal. Post the amounts in the General columns.
Accrued Expenses
Lesson 21-2
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627
SUMMARY
After completing this chapter, you can:
1. Define accounting terms related to accrued
revenue and accrued expenses.
2. Identify accounting concepts and practices
related to accrued revenue and accrued
expenses.
(
3. Record adjusting, closing, and reversing entries
for accrued revenue.
4. Record adjusting, closing, and reversing entries
for accrued expenses.
Go Beyond the Book
)
For more information go to
www.C21accounting.com
EXPLORE ACCOUNTING
A n n u a l R e p o r t s—Fi n a n c i a l
Inf o r m a t i o n a n d Mor e
1. Management’s Analysis and Discussion. This section provides management with an opportunity to
promote the corporation. Through the use of pictures,
graphs, and narrative, management can highlight the
achievements of the past fiscal year and present its
plans. Some corporations report on how the volunteer
work of their employees is having a positive impact
in their communities. Discussions of environmental
and recycling programs could demonstrate how the
corporation is socially responsible.
The ultimate objective of any corporation is to
increase the market price of its stock, thereby raising
stockholders’ investment. By “putting its best foot
forward” in this section, management can increase the
demand for the corporation’s products and stock, thus
increasing the stock’s price.
2. Financial Statements. The financial statements section
contains several items in addition to basic financial
628
Chapter 21
statements. Most of the additional items are
required by GAAP or the Securities and
Exchange Commission. As a result, these
items are similar among corporations.
a. Notes to the Financial Statements. The
notes contain additional, detailed
information about items presented on
the financial statements. For example,
the note related to long-term debt
would include the projected loan repayments for the
next five years.
b. Auditor’s Report. The report of the independent auditor
states that a public accounting firm has tested the
financial statements for accuracy and fair presentation. The report gives the reader confidence to use the
financial statements to make business decisions.
c. Financial Analysis. Summary financial information,
such as total assets, net income, and common financial
ratios, are presented for several years.
Instructions: Access an annual report using a library or
the Internet and prepare a detailed outline of its contents.
Summarize the major topics in management’s analysis and
discussion. Did management do a good job of “putting its
best foot forward?” Would you recommend that a friend
purchase the corporation’s stock? Support your answers.
Accounting for Accrued Revenue and Expenses
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
Corporations publish annual reports to communicate the results of operations to interested
parties, such as stockholders, creditors, and
government agencies. The typical annual
report is a colorful, soft-cover brochure
printed on glossy paper and 40 to 60 pages
in length. Most companies post a copy of
this report on their web site. The reports are
grouped in two sections:
211
APPLICATION PROBLEM
Journalizing and posting entries for accrued revenue
The accounting forms for this problem are in the Working Papers.
On December 31 of the current year, Velma Parts Company has one note receivable outstanding, a 120-day,
10%, $8,100.00 note dated November 6.
Instructions:
1. Plan the adjustment on a work sheet. Label the adjustment (a).
2. Journalize and post the adjusting entry for accrued interest income on December 31. Use page 14 of a
general journal.
3. Journalize and post the closing entry for interest income using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest income on page 15 of a general
journal.
5. Journalize the receipt of cash for the maturity value of the note on March 6, Receipt No. 457. Use page 8
of a cash receipts journal. Post the amounts in the General columns of the cash receipts journal.
212
APPLICATION PROBLEM
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers.
On December 31 of the current year, Delmar Plumbing Supply has one note payable outstanding, a 180-day,
10%, $12,000.00 note dated December 1.
Instructions:
1. Plan the adjustment on a work sheet. Label the adjustment (h).
2. Journalize and post the adjusting entry for accrued interest expense on December 31. Use page 14 of a
general journal.
3. Journalize and post the closing entry for interest expense using page 14 of a general journal.
4. Journalize and post the January 1 reversing entry for accrued interest expense on page 15 of a general
journal.
5. Journalize the payment of cash for the maturity value of the note on May 30, Check No. 756. Use page 27
of a cash payments journal. Post the amounts in the General columns of the cash payments journal.
213
APPLICATION PROBLEM
Journalizing and posting entries for accrued expenses
The accounting forms for this problem are in the Working Papers.
On October 14 of the current year, Patti’s Dress Shop signed a $10,000.00 note with National Bank of Columbus. The note term is 180 days at 12% interest.
Instructions:
1. Plan the adjustment on a work sheet for the fiscal year ended December 31. Label the adjustment (h).
2. Journalize and post the transactions to accrue, close, and reverse interest-related accounts at the fiscal
year-end. Use page 16 of a general journal for December 31 transactions and page 17 for the January 1
transactions.
3. Journalize the payment of cash for the maturity value of the note paid on April 12 with Check No. 377.
Use page 23 of a cash payments journal. Post the amounts in the General columns of the cash payments
journal.
Accounting for Accrued Revenue and Expenses
Chapter 21
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629
214
MASTERY PROBLEM
Journalizing and posting entries for accrued interest revenue and expense
The accounting forms for Youngblood, Inc., are given in the Working Papers. The balances are recorded as of
December 31 of the current year before adjusting entries. Youngblood, Inc., completed the following transactions related to notes receivable and notes payable during the current year and the following year. The first
two transactions have already been journalized and posted. One note receivable and one note payable are
the only notes on hand at the end of the fiscal period. Source documents are abbreviated as follows: receipt,
R; check, C; note receivable, NR.
Transactions:
20X1
Nov. 11. Accepted a 90-day, 12% note from Centre Plaza for an extension of time on their account,
$900.00. NR10.
Dec. 6. Signed a 120-day, 8% note, $7,200.00 with First American Bank. R336.
20X2
Feb. 9. Received cash for the maturity value of NR10. R336.
Apr. 5. Paid cash for the maturity value of the First American Bank note. C612.
Instructions:
1. Plan the adjustments on a work sheet. Label the interest income adjustment (a) and the interest expense
adjustment (h).
2. Journalize and post the adjusting entries for accrued interest income and accrued interest expense on
December 31. Use page 15 of a general journal.
3. Journalize and post the closing entries for interest income and interest expense. Continue to use page 15
of a general journal.
4. Journalize and post the reversing entries for accrued interest income and accrued interest expense. Use
page 16 of a general journal.
5. Journalize the receipt of cash for the maturity value of NR10. Use page 16 of a cash receipts journal. Post
the amounts in the General columns of the cash receipts journal.
6. Journalize the cash payment for the maturity value of the note payable. Use page 28 of a cash payments
journal. Post the amounts in the General columns of the cash payments journal.
215
CHALLENGE PROBLEM
Journalizing and posting entries for accrued interest revenue and expenses
The accounting forms for Blackwell Corporation are given in the Working Papers. The balances are recorded as
of December 31 of the current year before adjusting entries. Blackwell Corporation completed the following
transactions related to notes receivable and notes payable during the current year and the following year. The
first two transactions have already been journalized and posted. These notes are the only notes outstanding
on December 31, 20X1, the fiscal year-end.
Transactions:
20X1
Dec. 8. Margaret Snider signed a 90-day, 18% note for an extension of time on her account, $900.00.
NR56.
15. Signed a 180-day, 12% note with American National Bank, $10,000.00. R416.
20X2
Mar. 8. Margaret Snider dishonored NR56, maturity value due today. M98.
12. Paid off the American National Bank note ahead of the maturity date. American National charges
interest only for the number of days the note is outstanding, with no early payment penalty.
C645.
630
Chapter 21
Accounting for Accrued Revenue and Expenses
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Instructions:
1. Plan the adjustments on a work sheet. Label the interest income adjustment (a) and the interest expense
adjustment (h).
2. Journalize and post the transactions to accrue, close, and reverse interest-related accounts at the fiscal year-end. Use page 16 of a general journal for December 31 transactions and page 17 for January 1
transactions.
3. Journalize the 20X2 transactions using page 18 of a general journal and page 15 of a cash payments
journal. Post the Credit column of the general journal and the amounts in the General columns of the cash
payments journal.
A P P L I E D CO M M U N I C AT I O N
Employers often screen prospective employees for written communication skills. As an applicant, you may be asked
to write a short essay. Therefore, it is important for you to practice preparing documents that clearly communicate a
message, demonstrate proper usage of grammar rules, and project a professional image.
Instructions: Write a one-page memo to Gerard Spikes, Controller of Jenkins Company, that gives your opinion
on one of the following questions: (1) Why is a basic knowledge of accounting important for all employees of a
company, even for those not directly involved in accounting? (2) Why should the company help its employees to
continue their formal education by paying for one technical or college course each year?
CASE FOR CRITICAL THINKING
At the end of each fiscal period, Kimura Corporation prepares adjusting entries to record accrued interest expense.
However, the company does not record reversing entries for the accrued interest expense. At the end of the current
fiscal year, Kimura had a $3,000.00, 90-day, 10% note payable outstanding, signed November 1. Kimura made the
following journal entries related to the note.
Signed Note Nov. 1
Cash . . . . . . . . . . . . . . . . . . . $3,000.00
Notes Payable . . . . . .
Adj. Entry Dec. 31
Interest Expense . . . . . . .
50.00
Interest Payable . . . . .
$3,000.00
50.00
Closing Entry Dec. 31
Income Summary . . . . . .
Interest Expense . . . .
Paid Note Jan. 30
Notes Payable . . . . . . . . .
Interest Payable . . . . . . . .
Interest Expense . . . . . . .
Cash . . . . . . . . . . . . . . . . . . .
50.00
50.00
3,000.00
50.00
25.00
3,075.00
Isabel Lugo, an accounting supervisor, says that generally accepted accounting principles require that reversing
entries be used in conjunction with adjusting entries for accrued expenses. Thus, Ms. Lugo says Kimura must begin
using reversing entries for all accrued expenses. Is she correct? Do the procedures Kimura has been using result in
incorrect financial statements? Explain.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Reward Zone, Best Buy’s customer loyalty program, awards discount certificates to members, based on their purchases. The value of the discount certificate must be recorded as an accrued liability until the customer redeems the
certificate. Use the Sales Incentives section in the Notes to Consolidated Financial Statements on page B-16 in Best
Buy’s annual report in Appendix B.
Instructions
1. What account title is used to record discount certificates on the Consolidated Balance Sheets on page B-5?
2. What impact would the recorded debit have on the income statement when a discount certificate is issued?
Accounting for Accrued Revenue and Expenses
Chapter 21
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631
Accounting
SOFTWARE
ACCRUED REVENUE AND EXPENSES
One of the most valuable assets of any business is its financial information. The actions that ensure that a business
can quickly restore its access to and use its financial data is referred to as a disaster recovery plan. Creating a backup
copy of financial data is one of the most common components of a disaster recovery plan. Peachtree has a menu
option for creating a backup copy. Backup copies should be stored on a removable storage device and, preferably,
stored at a remote location. Of course, after transactions are recorded in the restored backup copy, a new backup
copy needs to be made.
PEACHTREE MASTERY PROBLEM 214
1. Open (Restore) file 21-4MP.ptb.
2. Journalize and post the adjusting entries for accrued interest income and accrued expense on December 31.
3. Journalize and post the closing entries for interest income and interest expense.
4. Journalize the post the reversing entries for accrued interest income and accrued interest expense.
5. Journalize and post the receipt of cash for the maturity value of NR10.
6. Journalize the cash payment for the maturity value of the note payable.
7. Print the December 31 to January 1 general journal, the February 9 cash receipts journal, the April 5 cash
disbursements journal, and the general ledger from December 1 to April 30.
PEACHTREE CHALLENGE PROBLEM 215
1. Open (Restore) file 21-5CP.ptb.
2. Journalize and post the adjusting, closing, and reversing entries for interest-related accounts.
3. Journalize and post the 2006 transactions.
4. Print the general journal, the cash receipts journal, the cash disbursements journal, and the general ledger.
ACCRUED REVENUE AND EXPENSES
When using accounting software, critical financial information about the company is stored in an
electronic file. QuickBooks allows the user to make a backup copy of the company’s data. If there is a problem with
the original file, the backup copy can be used. Any transactions recorded since the last backup was made will be
lost. Therefore, if any entries are recorded, a backup copy should be made at the end of the day.
It is important to store the backup file on something other than the computer on which the original file is stored.
It is also preferable to keep the removable storage device at a remote location.
QUICKBOOKS MASTERY PROBLEM 214
1. Open the Youngblood Inc file if it is not already open.
2. Journalize the reversing entries for accrued interest income and accrued interest expense as of January 1, 20X2.
3. Use the Make Deposits window to record the receipt of payment from Centre Plaza.
4. Print a journal report.
QUICKBOOKS CHALLENGE PROBLEM 215
1. Open the Blackwell Corporation file if it is not already open.
2. Journalize the adjusting entries for accrued interest income and expense as of December 31, 20X1.
3. Journalize the reversing entries for interest income and expense as of January 1, 20X2.
4. Calculate the maturity value of NR56. Record the dishonored note using the Make General Journal Entries
window.
5. Calculate the maturity value of the note from First National Bank as of March 12, 20X2, and record the payment.
6. Print the Journal report using December 31, 20X1 and March 31, 20X2 as the dates.
632
Chapter 21
Accounting for Accrued Revenue and Expenses
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R E P O R T I N G F I N A N C I A L I N F O R M AT I O N
Annual reports of many public companies contain summary financial information for 10 years. This information
provides investors with a rich history of the company’s operating results and financial strength.
Absorbing 10 years of financial information can be overwhelming if that information is presented in a table.
Charts provide a better approach of reporting this information. Line graphs are particularly adept at indicating
trends.
Electronic spreadsheets provide a variety of tools to modify the chart’s appearance. From adding titles to changing the scale of an axis, you can enhance the chart to ensure that the story of the financial information is clearly
communicated.
EXCEL MASTERY PROBLEM 214
Open the F21-4 Excel data file. Follow the step-by-step instructions in the Instructions work sheet.
OPTIONAL SPREADSHEET ACTIVITY
Open the F21-OPT Excel data file. Follow the step-by-step instructions in the Instructions work sheet. This problem
is not related to a specific problem in the textbook; however, it is related to the Explore Accounting feature in this
chapter.
ENTRIES FOR ACCRUED REVENUE
AND EXPENSES
To complete the accounting cycle, adjusting entries are entered and verified for accuracy. The financial statements
are generated and then closing entries are generated and posted by the software. On the first day of the next fiscal
period, some adjusting entries for accrued revenue and expense items affecting the next fiscal period are reversed
by recording reversing entries.
Closing entries are made to close all temporary accounts at the end of the accounting period. Automated
Accounting automatically prepares and posts closing entries.
To generate closing entries:
1. Choose Generate Closing Journal Entries from the Options menu.
2. Click Yes to generate the closing entries.
3. The general journal will appear, containing the journal entries.
4. Check the entries for accuracy, then click the Post button.
5. To display a post-closing trial balance report:
a. Click on the Reports toolbar button, or choose the Reports Selection menu item from the Reports menu.
b. Select the Ledger Reports option button from the Report Selection dialog box.
c. Choose Trial Balance report.
Revenue and expense items that affect two fiscal periods are adjusted at the end of a fiscal period and then
reversed at the beginning of the next fiscal period. Reversing entries are recorded in the general journal the same
way as adjusting entries. Use Rev.Ent. as the reference.
AUTOMATED ACCOUNTING MASTERY PROBLEM 214
Open file F21-4.AA8. Display the problem instructions and complete the problem.
Accounting for Accrued Revenue and Expenses
Chapter 21
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633