Annual rent income of ₦480,000 is receivable by a business enterprise on or before the last day of every month from July 2015. The accounting period of the business enterprise is from 1 July to 30 June. The rent was received before the due date from July 2015 to May 2016. The income was received through the bank. But in June, there was a delay between the time the rent income was due for receipt and the time the rent income was received. The rent income of ₦40,000 for June was anticipated on 30 June 2016, and it was received on 10 July 2016.
Required: Show the double entry for rental income in the relevant ledgers.
A suggested solution to practice activity 6.5
The double entry for rent income received is as follows.
Debit Bank account or Cash book (that is, the bank column in the cash book)
Credit Rent income account
Based on the IASB (2018, Conceptual Framework), the application of the accrual basis in measuring and recognising rent received shows the effects of rent received on a reporting entity’s assets and claims in the period ended 30 June 2016 that those effects occur, notwithstanding that the eventual cash receipts occur in the period ended 30 June 2017.
Using the accrual basis, the effects of rental income on the reporting entity’s economic resources can be seen. Also, the claims in the period in which those effects take place (that is, from 1 July 2015 to 30 June 2016) can be seen, even if the eventual cash receipts occur in on 10 July 2016.
The profit or loss should depict the effects of rental income in the period that the effect of rent income occurs (that is, the period ending 30 June 2016). The rent income for the accounting period ended 30 June 2016 is ₦480,000.
Rental income increases the gross profit by ₦480,000.
The rent income of ₦480,000 is for the accounting period ended 30 June 2016. The rent income of ₦480,000 should be added to the gross profit in the statement of profit or loss for the 30 June 2016 accounting year.
The accounting year of the reporting entity ends on 30 June 2016. Look at the rent income account. Check the rent income received as of 30 June 2016. A close observation of the rent income account shows that the most recent rent income of ₦40,000 was received on 31 May 2016.
Then, post the actual rent income of ₦480,000 to the profit or loss account.
An attempt to balance the rent income account shows that ₦40,000 is yet to be received on 30 June 2016 from the actual annual rent income of ₦480,000. The outstanding rent income of ₦40,000 should be termed ‘accrued c/d.’
The accrued c/d represents an accrued income. Accrued income b/d is on the debit side of the rent income account. This implies that rent income of ₦40,000 is yet to be actually paid for as of 30 June 2016.
Accrued rental income is an asset. Since the rent income for June 2016 is paid on 10 July 2016, the ₦40,000 is an amount that can be readily converted to cash within the next one year (current asset). Remember the elements of financial statements.
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