MODULE 7B

The Accounting Cycle of the Process - Summarizing Phase (Adjusting the Books)

ACCRUED INCOME
▪ These are income already earned but not yet received or collected at the end of the reporting period.
▪ The accounts affected are the following:
a) Income account
b) Asset account, particularly receivable account, because these revenues are not yet collected.

▪ These revenues are generally not yet recorded in accounting books at reporting date making the accounts affected
understated.
Account Before To adjust Position
Income Understated To increase Credit
Receivable Understated To increase Debit

▪ Pro-forma adjusting journal entry:

Receivable (specify the account) xxx
Income (specify the account) xxx

▪ Some common examples of revenues that are not normally recorded at the end of accounting period but already earned are
the following.
a) interest on notes receivable collectible at maturity date which is beyond the end of the current accounting period.
b) rentals in which the use of property is already served to tenants but no collection yet until the end of the current
accounting period.

Nature of Expense Income Account Asset Account

Interest on Notes Receivable Interest Income Interest Receivable
Accrued Interest Income
Accrued Interest Receivable
Accounts Receivable
Rental Rent Income Rent Receivable
Accrued Rent Income
Accrued Rent Payable
Accounts Payable

▪ Illustration 1 - Accrued Interest Income

Case 1:
On December 16, 2022, Triump Company received a promissory note in settlement of customer's overdue account amounting
to P 30,000. The term of the note is 60 days with interest rate of 10%. Interest is collectible at maturity date.

Question:
1. What is the maturity date of the notes receivable?
Solution:
The maturity date is February 14, 2022.
It is determined from the December 1, 2022 plus 90 days. See below:
December, 2022 31 days - 16 (the date of note) 15 days
January, 2022 31 days 31 days
February 14, 2022 28 days 14 days
60 days

Take note that the date of the note is not included in the computation of interest income. The earning of interest will start
the next day, or the day after the date of the promissory note.

2. What is the total interest income on notes receivable at maturity date?

Solution:
Interest at maturity date = Principal x Interest Rate x Time [I = PRT]
Interest at maturity date = P 30,000 x 10% x 60 days / 360 days
Interest at maturity date = P 500
 3. How much of the total interest income is to be recognized as interest income for the year 2022?
Solution:
▪ Interest income for the year 2022 is P 125.
▪ This is the interest actually earned from December 16 to December 31, 2022 or for 15 days (31 days in December less
date of note which is 1).
▪ It can be computed either of the following ways:
a) Interest income earned for 2022 = P 30,000 x 10% x 15 days / 360 days
Interest income earned for 2022 = P 125
b) Interest income earned for 2022 = P 500 for 60 days x 15 days / 60 days
Interest expense incurred for 2022 = P 125

4. How much of the total interest income is to be recognized as interest income for the year 2023?
Solution:
▪ Interest income for the year 2023 is P 375.
▪ This is the interest to be earned from January 1 to February 14, 2023 (maturity date) or for 45 days.
▪ It can be computed either of the following ways:
a) Interest income for 2023 = P 30,000 x 10% x 45 days / 360 days
Interest income for 2023 = P 375
b) Interest income for 2023 = P 500 for 60 days x 45 days / 60 days
Interest income for 2023 375

5. How much is the accrued interest income on notes receivable at December 31, 2022?
Solution:
The accrued interest expense on notes payable at December 31, 2022 is P 125. (See Number 3).

6. What would be the necessary adjusting journal entry at December 31, 2022?
Solution:
Interest Receivable 125
Interest Income 125
Accrued interest income at year-end.

Take note that without this adjusting journal entry, the Interest Income balance is understated by P 200 while the
Interest Receivable (an asset account) is also understated by the same amount. By having this adjusting entry, these two
accounts are now updated and ready to be reported with reliable information in the financial statements. The Interest
Income in the Income Statement while the Interest Receivable in the statement of financial position.

EXERCISES

EXERCISE 1
Concept of Adjusting Process
State whether the following statements are TRUE or FALSE. Write your answer on the space provided before each number. Use
only CAPITAL LETTERS.

FALSE 1. Accrued revenues are revenues already collected but not yet received.
TRUE 2. Accrued revenues are not yet recorded in accounting books at the end of the accounting period.
TRUE 3. Prior to recognition of accrued revenues in accounting books, the affected income account is understated.
FALSE 4. Prior to recognition of accrued revenue in accounting books, the affected asset account is overstated.
FALSE 5. To recognize accrued income, the affected income account is debited.
FALSE 6. To recognize accrued income, the affected asset account is credited.
TRUE 7. Accrued income is also called accrued asset.
TRUE 8. Accrued revenues are normally collected during the next accounting period.
FALSE 9. Accrued income is an income account.
TRUE 10. The adjusting entry for accrued income is debit to receivable account and credit to income account.
EXERCISE 2
Computation of accrued interest income on notes receivable
The Notes Receivable account balance of Hollywood Company at December 31, 2022 is P 100,000 that consists of the following
promissory notes:

INTEREST INCOME
Interest Up to Up to
PN No. Face Amount Date of PN Terms Rate maturity 12/31/22
1 40,000 11/16/22 90 days 9% 900 150
2 60,000 12/01/22 6 months 10% 3,000 500
3 20,000 12/16/22 60 days 12% 400 100
4 80,000 12/21/22 180 days - 0

Required:
1. Complete the given table by computing the interest expense (a) up to maturity date, and (b) up to December 31, 2022.
2. Prepare the necessary adjusting journal entries at December 31, 2022.

EXERCISE 3
Adjustments and collections of accrued items
(Source: Financial Accounting 6th Edition by Larson and Miller)

The following are the three situations require adjusting journal entries to prepare financial statements as of June 30, 2023. For
each situation, present the adjusting entry and the entry that would record the collection of the accrued assets during July, 2023.

a) The company owns a commercial space and various tenants are renting it for a total of P 200,000 per month. At June 30,
2023, the said amount is not yet collected.
b) The company received a P 390,000 notes payable that requires 0.8% to be collected each month on the 25th of the month.
The interest was last collected on June 25 and the next collection is due on July 25.

SOLUTION GUIDE:
AJE at June 30, 2023 JE to Record Payment in July, 2023
Situation Account Names Debit Credit Account Names Debit Credit
(a) Rent Receivable 200,000 Cash 200,000
Rent Income 200,000 Rent Receivable 200,000
Rent earned but uncollected. Collection of June rent income.

(b) Accrued Interest Income 43 Cash 43

Interest Income 43 Accrued Interest Income 43
Interest earned but uncollected. Collection of June interest income.
(P 390,000 x 0.8% x 5/360)