Adjusting Entry for Accrued Income

What Is Accrued Income? Accrued income is money that’s been earned but that isn’t received during the accounting period. Examples of accrued income include interest on deposits, rent, commissions, and discounts. Since accrued income accumulates in the current year, it should be credited to the income statement (trading and profit and loss account), and the accrued income account should be debited,…

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Accrued Interest

Accrued Interest: Definition Accrued interest refers to the payment made for the use of money. Many loans or notes are interest-bearing and have the following characteristics: Principal or face amount: The amount lent or borrowed Maturity date: The date the loan must be repaid Maturity value: The total of the principal and interest at the maturity date Interest rate: The percentage rate of interes…

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Prepaid Assets

Prepaid Assets: Definition Prepaid assets are nonmonetary assets whose benefits affect more than one accounting period. They include items such as prepaid insurance and prepaid rent and essentially represent the right to receive future services. However, the rights to these future benefits or services rarely last more than two or three years. Prepaid Assets: Explanation The matching convention req…

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Income Received in Advance

What Is Income Received in Advance? If a business has received a payment for a service that it has not rendered by the year-end, then this is considered income received in advance. Income received in advance should be excluded from the year’s profit and loss account. In principle, this adjustment resembles an adjustment made for prepaid expenses. Example: Adjusting Entries for Income Received in A…

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Accrued Expenses

Accrued Expenses: Definition Accrued expenses are expenses that have been incurred (i.e., whose benefit or services have already been received) but which have not been paid for. An alternative definition of accrued expenses is that they are expenses that have been incurred but not recorded, necessitating adjusting entries and the inclusion of items such as interest expenses, salary expenses, and t…

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Adjusting Entries MCQs 2

This is the second multiple choice question (MCQ) test on adjusting entries. These MCQs are suited for exam preparation, interview training, and revising for other assessments. The first MCQ test covered Questions 1 to 14. This MCQ test includes Questions 15 to 25. If you find it difficult to answer these MCQs, we advise that you read more about adjusting entries before completing the test.  …

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Adjusting Entries and Their Purpose

Adjusting Entries An adjusting entry is an entry that brings the balance of an account up to date. Adjusting entries are crucial to ensure the correct balance and correct information in an account at the end of an accounting period. Before exploring adjusting entries in greater depth, let’s first consider accounting adjustments, why we need adjustments, and what their effects are. Accounting Adjus…

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Adjusting Entry for Interest on Capital

A business owner may regard their capital as an investment on which they should receive interest. Interest at a normal rate is calculated on owner’s capital and is charged to the income statement (or profit and loss account) for the purpose of ascertaining what extra income is derived from the business over and above the usual rate of interest on capital employed. The capital invested in the busin…

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Adjusting Entries for Interest on Drawings

In accounting, drawings are withdrawals of cash, merchandise, or other items from the business by the owner for their personal use. In certain cases, drawings are treated as loans to the owner, with interest charged at the normal rate. Accounting Treatment The amount of interest charged on drawings is an indirect income of the business. On the other hand, it is a personal expense of the owner. Int…

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Prepaid Expenses

Prepaid Expenses: Definition Unexpired or prepaid expenses are the expenses for which payments have been made, but full benefits or services have yet to be received during that period.  Such payments fall into two portions. The first portion, comprising received benefits, is an expense. As for the second portion, which involves the incoming benefits or services used in the coming period, this repr…

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