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Accrued Revenues

Revenues that are likely to be received but not received during an accounting period are called accrued revenues. These revenues are shown in the financial statements prepared for an accounting period in which they are earned but not yet received. They are usually received after the end of an accounting period.

The adjusting entries for accruals prepared at the end of an accounting period are to ensure that the accrued revenues earned in the period are reported so as to not understate the net profit. If the revenues are received, they are likely to be recorded in the books and accounts. It is also likely that they are not recorded if they are not received by the end of the period. Such adjustments have to be made before the final accounts are prepared.

In compliance with the generally accepted accounting principles (accrual accounting, revenues are matched with expenses on the income statement in the same accounting period in which they are earned and incurred, and not when the cash is received or paid. Applying this accrual system of accounting avoids distorting the net profit on the income statement and related balances on the financial statements.

Accrued revenues such as rent receivable, commissions, interests on investments, etc. are always transferred to the credit side of profit and loss account. On the balance sheet, they are recorded as assets as they are amounts earned and when received will add to the asset of cash.

For example, you let out a building for $6,000 per annum. The yearly rent is received quarterly. Each quarterly payment you receive is usually a few days after the rent becomes due. The accounting period ends on 31st December. The following table shows the details

Quarterly amount Rent due date Date received
$

1,500 31 March 20X1 6 April 20X1
1,500 30 June 20X1 3 July 20X1
1,500 30 September 20X1 5 October 20X1
1,500 31 December 20X1 4 January 20X2


Journal entry for the year-end adjustment:

Date Particulars Dr Cr


$ $
20X1


Dec 31 Rent Receivable 1,500

Profit and Loss
1,500

(Rent accrued)


The rent receivable account that appears in the general ledger:

Rent Receivable Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X1


Dec 31 Profit and Loss
6000*
Apr 06 Bank
1,500





July 03 Bank
1,500





Oct 05 Bank
1,500





Dec 31 Balance c/d
1,500












6,000



6,000









20X2







Jan 01

1,500




* This sum includes the above journal entry of $1,500. The sum is transferred to the profit and loss account at the end of the year.


Another example:

Interests on investments for the year have not been received by the year end. As the revenues have not been received, they are not recorded although they have been earned. If such an adjustment for accrued revenues is not made, it will understate the assets, revenues and net income. An adjusting journal entry is therefore written up to accrue the interest receivable.


Journal entry for the year-end adjustment:

Date Particulars Dr Cr


$ $
20X3


Dec 31 Interest Receivable 3,000

Interest Revenue
3,000

(Interest accrued)


The rent receivable account that appears in the general ledger:

Posting to the general ledger

Interest Receivable Account

Date Particulars Folio Amount
Date Particulars Folio Amount









20X3







Dec 31 Interest Revenue
3,000





Interest Revenue Account

Date Particulars Folio Amount
Date Particulars Folio Amount














20X3







Dec 31 Interest Receivable
3,000

The Interest Receivable Account balance of $3,000 is carried forward to the next accounting period as the opening (debit) balance.

The Interest Revenue Account balance of $3,000 is charged to the Profit and Loss Account and the account closed.


Alternative presentation:

Interest Receivable

Date Accounts Ref. Debit Credit Balance



$ $ $
20X3




Dec 31 Interest accrued
3,000
3,000


Interest Revenue

Date Accounts Ref. Debit Credit Balance



$ $ $
20X3




Dec 31 Interest accrued

3,000 3,000


Last Updated (Thursday, 07 October 2010 15:59)