Lesson 10-2
 
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Lecture

Lesson


Unearned Revenue is revenue that is received in one fiscal period but not actually earned until another fiscal period. An example of Unearned Revenue would be a deposit on an apartment you expect to rent. Let's say you are going to move into an apartment that costs $600 per month. Before you move in, they expect one-month's rent in advance. That means, the day you move in, you will pay $1,200 (a month in advance for deposit and the current month's rent). The current month's revenue is earned revenue, but the deposit is unearned. A business has the right to classify the unearned amount either as a liability OR revenue. The two accounts used in this example are Unearned Rent (a liability) and Rent Income (a revenue).

Unearned Rent (L)

Debit


Credit
Normal Balance
+
Rent Income (R)
Debit

Credit
Normal Balance
+

At the end of the fiscal period, only revenue earned can be recorded in the Rent Income account. If the deposit and current rent were journalized there, it would need to be adjusted so only earned revenue is recorded in the Rent Income account.

Adjustment for Unearned Rent
Let's assume a business as a credit balance in the Rent Income account of $28,000. Part of that income was unearned, $4,000. The part that is unearned cannot remain in the Rent Income account. At the end of the fiscal period, that amount must be adjusted out so the value in the Rent Income account reflects what was earned.

Adj. Entry Unearned Revenue

If an adjusting entry creates a balance in an asset or liability account, the adjusting entry must be reversed on the first day of the next fiscal period. The rent that was unearned at the end of one fiscal period will eventually be earned. Therefore, the balance should be transferred back into the revenue account.

Reversing Entry for Rent Income


Accrued Interest Income
Revenue earned in one fiscal period but not received until a later fiscal period is called accrued revenue. In Lesson 10-1, we learned how to record Notes Receivables offered to our customers. At times, those notes will start in one fiscal period, but end in another. Even though interest is not recorded until the note is paid, interest is accruing each day. Interest that is accrued must be recorded, even if the note is not paid until later (Concept: Matching Expenses with Revenues).

At the end of the fiscal period, each note must be analyzed to determine how much interest was earned from the beginning of the note date until the end of the fiscal period. This interest will be recorded through an Adjusting Entry by debiting Interest Receivable and crediting Interest Income.

Interest Receivable (Asset)

Debit
Normal Balance
+

Credit

Interst Income (Other Revenue)
Debit

Credit
Normal Balance
+

Follow the steps below to calculate interest owed from the date the note was written to the last day in the fiscal period, and record the adjusting entry for interest income.

Adjusting Entry

This adjusting entry will need to be reversed for two reasons:

  • The adjusting entry creates a balance in an asset account (which are always reversed).
  • If the adjusting entry is not reversed, Interest Income will be recorded twice, once through the adjusting entry, and again when the note is paid.

Reversing Entry

Watch the videos below for a demonstration of how to record adjusting and reversing entries for unearned rent and accrued interest income.

Video Journalize Entries for Unearned Rent and Accrued Interest Income
Click HERE or on camera to start video
   
Assignments

Application (using Aplia)


  • Work Together 10-2
  • On Your Own 10-2
   
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