Kite Field Festival lets a corner of its site to a caterer for $600 a year. At the year end $150 of that rent, covering the final quarter of the year, is st...
Question 1 Report
Kite Field Festival lets a corner of its site to a caterer for $600 a year. At the year end $150 of that rent, covering the final quarter of the year, is still unpaid. Applying the accruals concept, state the rent income shown.
Answer Details
Under the accruals concept, income is credited to the period in which it is earned, regardless of whether the cash has been received. The caterer occupied the corner of the site for the whole year, so the festival earned the whole year's rent.
| $ | |
|---|---|
| Rent received during the year | 450 |
| Rent earned but unpaid at the year end | 150 |
| Rent income shown in the income statement | 600 |
The rent income shown is $600, made up of the $450 actually received for the first three quarters plus the $150 earned for the final quarter. The unpaid $150 is carried down as a debit balance on the rent receivable account and reported as an other receivable in current assets, so nothing is lost from the records: the income appears in the income statement and the amount still owed appears in the statement of financial position.
$450 is the cash received, which is the answer you get by abandoning accruals and reverting to a receipts and payments basis. $150 is only the outstanding quarter. $750 double counts by adding the arrears to a full year that already includes them.
Examination point: accruals applies to income in exactly the same way as to expenses. Income earned but not received is added to the income figure and shown as a receivable; income received in advance is deducted and shown as a payable.
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