Page 129 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

recognize these rights at the end of an accounting period by preparing an adjusting entry to correct the account
balances. To indicate the dual nature of these adjustments, they record a related revenue in addition to the asset.
We also call these adjustments accrued revenues because the revenues must be recorded.

Interest revenue Savings accounts literally earn interest moment by moment. Rarely is payment of the
interest made on the last day of the accounting period. Thus, the accounting records normally do not show the
interest revenue earned (but not yet received), which affects the total assets owned by the investor, unless the
company makes an adjusting entry. The adjusting entry at the end of the accounting period debits a receivable
account (an asset) and credits a revenue account to record the interest earned and the asset owned.
For example, assume MicroTrain Company has some money in a savings account. On 2010 December 31, the
money on deposit has earned one month’s interest of USD 600, although the company has not received the interest.

An entry must show the amount of interest earned by 2010 December 31, as well as the amount of the asset, interest
receivable (the right to receive this interest). The entry to record the accrual of revenue is:
2010
Adjustment Dec. 31 Interest Receivable 600
6—Interest Interest Revenue 600
revenue accrued To record one month's interest revenue.
The T-accounts relating to interest would appear as follows:

(Dr.) Interest Receivable (Cr.)
Increased by 2010
$600 Dec 31 Adjustment 6 600

(Dr.) Interest Revenue (Cr.)
2010 Increased by $600
Dec. 31 Adjustment 6 600.

MicroTrain reports the USD 600 debit balance in Interest Receivable as an asset in the 2010 December 31,
balance sheet. This asset accumulates gradually with the passage of time. The USD 600 credit balance in Interest
Revenue is the interest earned during the month. Recall that in recording revenue under accrual basis accounting, it
does not matter whether the company collects the actual cash during the year or not. It reports the interest revenue

earned during the accounting period in the income statement.
Unbilled training fees A company may perform services for customers in one accounting period while it bills
for the services in a different accounting period.
MicroTrain Company performed USD 1,000 of training services on account for a client at the end of December.
Since it takes time to do the paper work, MicroTrain will bill the client for the services in January. The necessary
adjusting journal entry at 2010 December 31, is:
Adjustment 7—Unbilled 2010
Dec. 31 Accounts Receivable (or Service Fees Receivable) 1,000
Service Revenue 1,000
To record unbilled training services performed in
December.

After posting the adjusting entry, the T-accounts appear as follows:
(Dr.) Accounts Receivable (Cr.)
2010

Accounting Principles: A Business Perspective 130 A Global Text